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No basis for hawkish turn as ECB holds firm

A meeting of the European Central Bank heralded few surprises on Thursday, but added fuel to speculation QE will continue past 2017,albeit in a tempered fashion.

At a press conference following a meeting of the ECB Governing Council, bank president Mario Draghi confirmed key interest rates would stay the same.

He said the ECB would continue with its €80bn asset purchasing programme in the belief that “the ongoing economic expansion will continue to firm and broaden”.

Draghi stated “we stand ready to increase our asset purchase programme in terms of size and/or duration,” to support headline inflation “in the medium term” if conditions became less favourable.

Draghi also revealed the ECB would continue with QE at a rate of £60bn until the end of December “or beyond, if necessary”.

Schroders’ senior European economist Azad Zangana believes the QE programme will continue into 2018, but will be further tapered.

He said: “Looking ahead, we now forecast the monthly purchases to be tapered again from January 2018 to €40bn per month, likely to be announced in September, then again to €20bn per month from in the third quarter, and finally down to €10bn per month for the final quarter of 2018.

“This should pave the way for interest rates to rise in early 2019.”

Draghi also responded to questions and outlined the risks the EU faced from a number of crucial elections in 2017, which could throw economic recovery off course.

Abi Oladimeji, chief investment officer at Thomas Miller Investment, said the ECB’s decision to do very little was “understandable” and added: “Over the next few months, political risks will come to the fore and markets will have to contend with elections in key eurozone countries, beginning with the Dutch elections next week.

“Clearly the risk that political events could undermine business and consumer sentiment, and dampen growth in the months ahead is high.

“Overall, there is little basis for a hawkish turn at this point or in the near future.”

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