The ECB decided to keep interest rates unchanged at 0.25% as expected, but language from ECB President Draghi was dovish and suggested we may see the central bank take action in the next few months. Draghi highlighted the fact that prolonged low inflation itself is a risk, and said the governing council have had a detailed discussion about the possibility of negative position rates. Narrowing the rate corridor and quantitative easing were also measures that were mentioned, with the President claiming QE would need to be designed carefully in order to be effective. Some light was also shed on the strength of the single currency but it was emphasized that any action taken would not be targeted at the exchange rate. Draghi reinforce the fact that he does not see deflation risks in the eurozone, but with these options playing a greater role in ECB meetings, we feel the concern is becoming greater.
The governing council felt more information was needed about the medium to long term inflation expectations before taking any action, but with different instruments tailored to address various issues it is unclear on what tool exactly the ECB is leaning towards. With the latest reading of 0.5%y/y surprising Draghi, the likelihood of invention in the next few months is increasing.
Sasha Nugent
Currency Analyst
