European Central Bank will hold monetary policy, but listen to what Mario Draghi doesn't say

Jasper Jolly
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Mario Draghi Holds First Press Conference In New ECB Headquarters
Investors will look for signs of more optimistic rhetoric (Source: Getty)

The European Central Bank (ECB) is expected to leave monetary policy unchanged when it meets tomorrow in Frankfurt, Germany.

However, investors will be listening closely for any change in tone from ECB president Mario Draghi when he faces the media at 2:30pm.

The ECB’s policymakers are likely to be encouraged by the strong possibility of centrist candidate Emmanuel Macron becoming French President in the run-off vote on 7 May against the far-right Marine Le Pen. Le Pen wants France to leave the euro.

Read more: Eurozone inflation slowdown dampens prospects of tighter monetary policy

However, given the political sensitivity of the moment the ECB is unlikely to make major changes to policy.

Chris Bailey, European strategist at Raymond James, said: “In the middle of the French Presidential cycle they’re not going to say anything.”

Any change could come in what is left unsaid. Draghi has insisted risks to the European economy “remain tilted to the downside” at all recent meetings, but could quietly drop that language if the rate-setting governing council wants to signal it is acknowledged an improving economic picture.

However, there is little expectation of any change to explicit monetary policy at the 1:45pm announcement, with the main ECB interest rate to be kept at zero per cent.

Read more: Macron rally sees markets gain $290bn

There is also unlikely to be any talk of tapering quantitative easing bond purchases – currently set to proceed at €60bn per month until December – until later in the year.

The ECB’s senior policymakers have made it clear repeatedly they will not look to tighten monetary policy until core inflation (ignoring volatile oil and food prices) rises sustainably towards its two per cent target.

Marius Gero Daheim, senior Eurozone strategist at Nordic corporate bank SEB, said: “Despite an unexpectedly strong drop in inflation in March, we believe Mario Draghi will reiterate that growth still relies on the ECB’s support and that underlying inflation still lacks a convincing uptrend.”

How to understand the European Central Bank's interest ratesĀ 

The European Central Bank (ECB) has three rates:

  • The main refinancing operations: what banks pay to borrow from the ECB

  • The rate on the marginal lending facility: the rate at which banks lend to each other overnight

  • The deposit facility: the rate banks receive to leave money with the ECB overnight

The ECB has kept interest rates unchanged since March 2016, when all three were cut. They have since stayed at zero per cent, 0.25 cent and minus 0.40 per cent respectively.

If a rate is negative the bank will pay the ECB (rather than receiving money in interest). Negative rates are intended to encourage banks to lend money to businesses rather than holding it themselves or, as is the case with the deposit facility rate, depositing it with the ECB overnight.

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