Published: Fri, March 10, 2017
Markets | By Erika Turner

No basis for hawkish turn as European Central Bank holds firm

No basis for hawkish turn as European Central Bank holds firm

Prior to this decision, economists and analysts are unanimous of their projections that Europe's central bank will keep the interest rate dovish.

The FTSE 100 closed 0.27% lower, at 7,314, in London while the CAC 40 also slipped 0.30% in Paris, to settle at 4,958.

Instead, it says: "We will maintain an open and fair global trading system" and "we reaffirm our previous exchange rate commitments".

A supply/demand imbalance and safe-haven buying at the short end of the German curve should keep rates near historical lows for the time being, while a combination of higher U.S. 10-year rates and a slightly more upbeat outlook for Euro-Zone growth should push 10-year Bund yields higher, widening the spread even further.

The TLTRO enables banks to trade in expensive debts for cheaper funding and has been particularly helpful for peripheral banks who have struggled with higher funding costs.

Over the year as a whole the European Central Bank now anticipates inflation of 1.7pc, up from a previous forecast of 1.3pc.

But the Munich-based Ifo economic research institute insisted Thursday a change of policy was overdue.

Even inflation, the ECB's key objective, has rebounded, essentially hitting the bank's target last month.

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European Central Bank president Mario Draghi will give further details on the ECB's decision at a news conference later.

The bank is now committed to continuing its bond-buying programme until at least December, although the €80bn-a-month quantitative easing (QE) scheme will be trimmed to €60bn a month from April.

Markets took that as a hint monetary policy could tighten sooner than previously thought, sending the euro up 0.4pc against the dollar.

Draghi's press conference was scheduled to start at 1330 GMT.

The ECB left its marginal lending rate at 0.25 percent and the deposit facility at negative -0.4 percent. As the central bank is widely expected to maintain its monetary policy steady today's policy meeting unlikely to be a major market mover.

He wrote: "We now forecast the monthly purchases to be tapered again from January 2018 to €40 billion per month, likely to be announced in September, then again to €20 billion per month from in the third quarter, and finally down to €10 billion per month for the final quarter of 2018".

But Fuest cites Ifo's own surveys revealing that "a growing number of firms plan to raise their prices in the months ahead", driving up core inflation to at least 1.5 percent in Germany and the whole bloc.

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