The ECB have decided to keep interest rates on hold for yet another month despite concerns that the euro area may slip into deflation. The last inflation reading provided upside surprise and the central bank’s projections show they expect inflation to increase only slightly this year to 1%, to 1.3% in 2015 and 1.5% in 2016. Therefore, the ECB’s medium to long term projections of inflation still remain well anchored and predict inflation will be slightly below the 2% in the fourth quarter of 2016. The ECB remain ready to act however considering the governing council see their “baseline by and large confirmed”, the likelihood of further easing has been reduced.
Taking into account the euros strength over the past few months, it is worth noting that ECB President Draghi estimated that inflation had be reduced by roughly 0.4 or 0.5 percentage points due to the strength of the single currency. Nevertheless this has not discouraged the market from buying euros pulling the GBPEUR rate below 1.21, and EURUSD through 1.3830.
Sasha Nugent
Currency Analyst
