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ECB Drops Easing Bias, Inching Closer To Stimulus Exit


The European Central Bank moved closer to exiting its massive monetary stimulus as it dropped the easing bias on asset purchases from its forward guidance, as sought by some policymakers in previous sessions, while leaving the key interest rates unchanged.

The Governing Council, led by ECB President Mario Draghi, left the key interest rates unchanged after the policy session in Frankfurt, in line with economists' expectations.

The main refi rate is currently at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate is 0.25 percent.

"The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases," the ECB reiterated.

The bank confirmed that the net asset purchases, at the new monthly pace of EUR 30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

Forward guidance was tweaked with the bank dropping its easing bias on asset purchases, as some economists' expected after a clear divide in the Governing Council surfaced over the past few policy sessions.

There was no mention of its earlier stance that the Governing Council stands ready to increase the asset purchase programme in terms of size and/or duration if the macroeconomic outlook turned less favorable.

"The change is arguably the ECB's first cautious step along a path of gradual policy normalization, which explains the immediate rise in the euro," Capital Economics economist Jennifer McKeown said.

"But it won't have come as a complete surprise given the ECB's earlier warning that it would "revisit" its forward guidance early this year."

In previous sessions, some policymakers had sought such a change to the forward guidance saying that the economic recovery was gaining momentum.

Principal payments from maturing securities purchased under the asset purchase programme will be reinvested for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary, the bank said.

"This will contribute both to favorable liquidity conditions and to an appropriate monetary policy stance," the ECB added.

Draghi is set to hold his press conference at 8.30 am ET in Frankfurt when he is expected to explain the change to the forward guidance. He is also expected to face questions regarding the Latvian banking system scandal and the Italian election results.

"If the Bank gives anything away about the path for asset purchases beyond September today, we think it will signal that a short taper is more likely than a sudden stop," Capital Economics' McKeown said.

"And as for interest rates, we think that they will ultimately rise in September 2019 - later than markets expect."

The ECB Chief will also unveil the latest ECB Staff macroeconomic projections.

In December, the ECB Staff forecast 2.3 percent growth for this year, 1.9 percent for next and 1.7 percent for 2020.

Inflation for this year was seen at 1.4 percent and at 1.5 percent in the next two years.

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