ECB Tweaks Policy Guidance But Euro Falls On Trade War Fears

Summary:

The European Central Bank held its monetary policy meeting last week. The ECB tweaks policy guidance in an apparent shift, the central bank was seen removing the easing bias from its forward guidance.

The central bank left interest rates unchanged at its meeting last week while also maintaining the monthly asset purchases at the pace of 30 billion euro per month. Investors were mainly focusing on the changes to the forward guidance which the central bank was contemplating upon since the December meeting last year.

Initially, reports suggested that officials wanted to change the language in order to reflect the changes in the fundamentals. However, weaker inflation in January saw ECB officials being somewhat hesitant, according to the minutes of the meeting that was released later.

The central bank had until the March meeting maintained that it would keep monetary policy accommodative and that it would stand ready to increase the asset purchases both in size and time if economic conditions had deteriorated.

However, the March monetary policy meeting statement showed that the central bank removed this easing bias. The change sent a signal to the markets that the ECB’s stimulus program could be coming to an end by September.

Justifying the removal of the easing bias, Draghi said that the solid economic recovery in the eurozone had supported the officials’ view to tweak its language.

“Incoming information… confirms the strong and broad-based growth momentum in the euro area economy, which is projected to expand in the near-term at a somewhat faster pace than previously expected,” the minutes showed.