The euro has been given a boost from less dovish remarks by ECB President Draghi, following the rate announcement which saw the central bank keep interest rates unchanged at 0.25%. The language was fairly unchanged considering what we have heard from the ECB in the last few months, however the unexpected dip in inflation had the market anticipating a more negative statement.
Draghi continued to emphasize the central banks focus on its medium to long term inflation expectations, claiming that more information is needed for the ECB to take action. The slip in inflation back to 0.7% y/y hardly affected the central bank’s stance and despite prolonged low inflation being a risk within itself, Mr Draghi said “We are alert to these risks and we stand ready and willing to act”.
There has been a grey area over what tools in particular the central bank stand ready to deploy. Some analysts thought the ECB could stop absorbing the euros created from its Securities Markets Programme. Although Mr Draghi claimed that this was one of the options being investigated, he also highlighted that there are other instruments being considered.
So where does the ECB stand now? In the same position it did before. The governing council require more information before deciding on whether to act, and “expect key interest rates to remain at present or lower levels for an extended period of time”. With Mr Draghi insisting the ECB does not see deflation in the eurozone, it is no surprise that the market took this as an opportunity to buy some more euros.
Sasha Nugent
Currency Analyst
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