Mario Draghi says risks to the Eurozone economy are becoming more "balanced" as ECB holds monetary policy

 
Jasper Jolly
European Central Bank To Announce Bond-Buying Program
Mario Draghi has been committed to an accommodative stance (Source: Getty)

The European Central Bank (ECB) has left monetary policy unchanged in a week when European markets took heart from diminishing political risk.

However, ECB president Mario Draghi tweaked his tone when talking about the risks facing the European economy.

While risks "remain tilted to the downside", as has been noted in previous meetings, Draghi added the risks were "moving towards a more balanced configuration".

Draghi said the rate-setting governing council was unanimous in accepting this judgement.

In its monetary policy statement the ECB said it expects "the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases."

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The ECB's main refinancing rate, at which it lends money to banks, has remained at zero per cent since March 2016. Starting this month the pace of asset purchases has fallen to €60bn per month. The quantitative easing programme is set to continue until at least December, unless the ECB changes course.

ECB president Mario Draghi has avowed his intention to make monetary policy "boring" in the coming months, but economic fundamentals threaten to enliven discussion around the central bank's Frankfurt headquarters. An improving economic picture in business surveys and other indicators such as car sales have raised pressure on the governing council to start tightening monetary policy.

That was highlighted this week as European markets soared after Emmanuel Macron made the final round of the French Presidential election. The independent centrist candidate has reassured markets spooked by the anti-euro, far-right candidate Marine Le Pen.

While Draghi refused to comment directly on the election, he hinted the "policies, not politics" put forward by Le Pen may have been discussed by the governing council.

He also hinted at discussions with US politicians showing the risks of protectionist policy from the administration of President Donald Trump had receded.

The more positive outlook from the policymakers leaves a small possibility for the ECB to begin to tighten in coming meetings. Economists have pinpointed the June meeting of the governing council as a possible time for discussions on tapering quantitative easing.

Read more: Whisper it, but the European economy is in surprisingly good shape

The European Commission's economic sentiment index confirmed confidence is rising in separate data today. It reached its highest point since September 2007, the start of the global financial crisis.

However, the ECB has remained committed to its loose monetary policy until it sees inflation rising sustainably towards its two per cent target.

Although inflation briefly hit two per cent in February, the central bank correctly judged the rise would only be temporary as the effects of rising oil and food prices started to diminish. Inflation fell back to an annual rate of 1.5 per cent in March.

However, new data released today showed inflation in Germany, the Eurozone's largest economy, rebounded to two per cent in April, setting the scene for a higher Europe-wide figure.

Mario Draghi has repeatedly said the ECB will wait until core inflation, which ignores the effect of volatile components of the price index, starts to show a sustained upwards movement.

Core inflation grew by 0.7 per cent in March.

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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