The European Central Bank has taken its very first step towards exiting its massive stimulus by omitting the mention of "lower levels" for interest rates in its forward guidance, on Thursday, even as the bank chief Mario Draghi denied that there was any discussion of tapering in the latest policy session.
The Governing Council, led by Draghi, kept all three interest rates unchanged for a tenth successive policy session, in Tallinn, Estonia, as policymakers remain unconvinced whether inflation will move closer to target despite the robust growth.
The main refi rate was held at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate was kept at 0.25 percent.
The bank also retained its asset purchases of EUR 60 billion a month till December 2017. The size was reduced in March from EUR 80 billion.
"The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases," the ECB said.
The ECB tweaked the language of this statement, which in April read "present or lower levels" for interest rates.
Another change in communication was that the bank called the risks to the economic outlook "broadly balanced", while they were seen "to the downside" earlier.
These changes marked the official start of a taper tiptoeing, which will take a long time before it could be called policy normalization, ING Bank economist Carsten Brzeski said.
"A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term," Draghi said in his introductory statement.
"If the outlook becomes less favorable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration," the bank said.
Responding to questions from reporters during his post-decision press conference, Draghi said the bank shed its easing bias as the deflation risk has totally disappeared. The ECB chief also said that the bank was ready to lower rates if risks reappeared.
However, he said that there was no discussion on tapering or normalizing interest rates in the Governing Council as it was not yet time to think of such steps given the subdued inflation in the euro area.
Draghi said the latest moves were not unanimous, but he never heard any dissenting voice in the rate-setting body.
"We need to be patient and we need to be confident," Draghi said.
"We need to be persistent, we need to accompany the recovery with our monetary policy."
The bank trimmed the inflation projections to mainly reflect lower oil prices. Inflation projection for this year was trimmed to 1.5 percent from 1.7 percent.
The outlook for next year was slashed to 1.3 percent from 1.6 percent. The forecast for 2019 was cut to 1.6 percent from 1.7 percent.
Measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as unutilized resources are still weighing on domestic price and wage formation, Draghi said.
"We are confident inflation will converge to our objective in a durable way," Draghi told reporters.
Quizzed on the speculation that ECB may fail to bring inflation to its 'below, but close to 2 percent' target, Draghi said there was no ground for such a scenario now as the inflation picture has not changed much.
The bank raised the euro area growth forecast for this year to 1.9 percent from 1.8 percent. The outlook for next year was raised to 1.8 percent from 1.7 percent. The growth projection for 2019 was boosted to 1.7 percent from 1.6 percent.
Following today's meeting, economists widely expect the ECB to signal the start of tapering in September, but do not foresee normalization of interest rates any time soon as inflation is set to remain subdued.
"There is clearly room for another "longer but lower" announcement for 2018 later this year," ING Bank's Brzeski said.
"We still expect an ECB announcement in September that bond purchases are to be tapered off gradually as of January and… halted at the end of 2018," Commerzbank economist Joerg Kraemer said.
"The return to a normal monetary course will sadly be a painfully slow process," he added.
by RTT Staff Writer
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