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Macroeconomics 26 Jan 2018

ECB meeting: No clues on the normalization of monetary policy

As had been expected, following its monthly meeting the European Central Bank left interest rates unchanged. At the same time, ECB President Mario Draghi introduced the exchange rate as an element of uncertainty, stressing that he will monitor the fluctuations in the euro and their possible consequences. Likewise, he reiterated the possibility of broadening the bond purchase program, continuing his accommodative policy, which will be accompanied by interest rates at minimum levels for a long period of time.

As had been expected, following its monthly meeting the European Central Bank left interest rates unchanged. The ECB also reiterated that the asset purchase program will be carried out at a monthly rate of 30 billion euros through September 2018. Mario Draghi didn´t rule out the possibility of broadening this program, both in terms of size and length of time, if it were to be necessary. Likewise, he reaffirmed his intention to keep interest rates unchanged until long past the conclusion of the asset purchase program that was originally foreseen. In fact, he pointed out that the chances of an interest rate increase this year are very scarce. One of the reasons that support this strategy is that there have been few changes in the outlook for growth, only a strengthening of the economy.

As BBVA Research points out in its  ECB Watch report, although it doesn´t seem that the European monetary authority intends to speed up the normalization of its monetary policy, it should provide some leads during the first half of 2018, to prepare the market for possible changes. There is speculation about the possibility that this may happen in March or April, once it is confirmed that inflation has bottomed out.

Likewise, the president of the ECB pointed out that the recent appreciation in the euro exchange rate constitutes a source of uncertainty that requires supervision, since it is important for growth and for price stability. Mario Draghi stressed that exchange rate volatility could have negative implications for financial stability and could even lead to an undesired hardening of financial conditions; if that were the case, he could rethink his strategy for monetary policy.

Regarding the outlook for growth, the economic expansion continues at a robust pace and the risks surrounding the Eurozone continue to be comprehensively balanced.

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