ECB keeps policy rates and guidance, euro spikes despite Draghi talk
The European Central Bank left interest rates and its forward guidance on policy unaltered on Thursday, pledging to keep its asset purchases running until inflationary pressures pick up.
The ECB made no change in terms of language or guidance, holding back from recent indications that it was preparing to tweak up the pace of policy tightening after the euro's recent surge to a three-year high.
The key refinancing rate was left unchanged at 0.00%, as economists expected, as were the deposit facility rate, marginal lending facility rate and asset purchase target at -0.4%, 0.25% and €30bn respectively.
Assurance was repeated that the ECB governing council intends to keep net asset purchases at the monthly pace of €30bn "run until the end of September 2018, or beyond, if necessary", with the council was ready to increase the asset purchase programme "in terms of size and/or duration".
Since December’s minutes revealed the council's intention to "revisit" forward guidance early this year, some traders and economists predicted that some change would be announced.
The euro, which had surged in recent days amid talk from US treasury secretary Steve Mnuchin and ongoing strong eurzone data, was little moved after the policy announcement on Thursday, but spiked up to $1.252 during the press conference with the central bank's president Mario Draghi.
“Between yesterday’s Davos talkfest and today’s ECB presser, the golden jawbone of currency depreciation seems to have passed from Draghi to Mnuchin," said Ranko Berich, analyst at Monex Europe. "Draghi and the Governing Council, while slightly surprised by the euro strength seen since the release of the last ECB minutes, can no longer credibly promise to loosen policy enough to dent bullish market sentiment on the euro."
He added that the 'Draghi Effect' now appeared to be "well and truly a thing of the past" and that even though Mnuchin has since clarified that he was not making policy announcements, "the damage seems to have been done".
With the euro-dollar is now closer to its 2014 pre-QE highs than to last years lows, it reflects "a seismic shift in market expectations of policy and growth the eurozone and US", Berich said.
A "copy and paste job" from the ECB, said analyst Neil Wilson at ETX Capital, was not unexpected. "If it had wanted to deliver a hawkish signal and prepare markets for a faster pace of tightening, it could have tweaked language slightly but this always looked unlikely, particularly given the recent appreciation in the euro."
David Lamb, head of dealing at FEXCO Corporate Payments, said Draghi had done his best to pour cold water on the euro.
“By reaffirming his commitment to keeping Eurozone interest rates lower for longer, the clear – if undeclared – aim of Mr Draghi’s dovish press conference was to keep the euro in check and prevent a strong single currency from hurting Europe’s export boom.
“So far his efforts have failed, with the euro rising against both the dollar and sterling. The reality is that - in currency terms at least - his leverage is limited, as the primary reason for the euro’s rise against the greenback is dollar weakness rather than any inherent euro strength.
“With the ECB’s money presses due to continue running until September and an interest rate hike possibly even further away, by rights the Federal Reserve’s hawkish stance should be bolstering the dollar."