Draghi's blurry guidance still lights the way to European Central Bank exit


The euro crept higher against the US dollar Thursday, as investors waited to hear what the European Central Bank may do next with monetary policy as headline inflation has pushed just above the bank's target.

"Support from our monetary policy measures is still needed".

"The reason is simple because it is hard to write off the positive impact of growing inflation and growth [.] It is in Draghi's interest to keep buying more time until we have navigated through all these [political] storms and sailing becomes smoother".

While markets aren't fully pricing in interest rate hikes until at least 2018, the tone of Draghi's remarks nonetheless boosted the euro and lifted benchmark German bund yields, with 10-year paper now trading at a four-week high of 0.45%.

At the press conference following the policy decision, Draghi said it was too early to declare victory in the ECB's fight for price stability - though "risks of deflation have largely disappeared", reiterating an assessment he made in January.

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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. Investors already have higher borrowing costs in sight and are debating the sequence in which the European Central Bank will normalise monetary policy.

Despite the increased forecasts, Mr Draghi said that the European Central Bank would not increase interest rates, which it has long fixed at historic lows, or look to wind down its mass bond-buying programme.

The euro rose to the day's high at US$1.0605, up more than half a per cent on the day. Inflation was nominally above the ECB's goal last month when it reached 2 per cent, yet without real evidence that it's sustainable over the medium term at those levels, Draghi's stance is that such a discussion is premature. "Now these risks - some of them - have materialised, but we haven't seen yet a significant economic impact". "We are more optimistic about the growth forecast, we have to see how these improved prospects, as far as growth is concerned, translate into higher headline inflation".

For now there will be no change to the ECB's policies.

"We got the confirmation on growth and they're not ready yet to remove the easing bias on forward guidance, so they're certainly not ready to taper", said Richard Barwell, an economist at BNP Paribas Investment Partners in London.