The European Central Bank (ECB) on Thursday stood pat on rates, a stance that aligned with its decisions in the past four meetings.
Rates on hold: The ECB’s Governing Council kept all three policy rates unchanged as its updated assessment showed that inflation would stabilize at the 2% target in the medium term. The assessment may not be way off the mark as the provisional inflation number released on Wednesday showed annual inflation falling to 1.7% in January from 2% in December.
The unchanged stance leaves the deposit facility at 2%, the main refinancing operations at 2.15% and the marginal lending facility at 2.40%.
The Bank of England also announced pause decision earlier on Thursday, although the narrow vote margin provided a dovish tilt to the decision.
ECB also said it is continuing to taper its asset purchase program (APP) and pandemic emergency purchase program (PEPP) at a measured pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.
ECB’s Economic Assessment: The central bank said the economy has shown resilience despite the challenging global environment. “Low unemployment, solid private sector balance sheets, the gradual rollout of public spending on defence and infrastructure and the supportive effects of the past interest rate cuts are underpinning growth,” the ECB said.
The apex bank, however, expressed concerns about the outlook, particularly due to the ongoing global trade policy uncertainty and geopolitical tensions.
Speaking at a press conference that followed the monetary policy announcement, ECB President Christine Lagarde called for strengthening the euro area and its economy by governments prioritizing “sustainable public finances, strategic investment and growth-enhancing structural reforms.”
On inflation, Lagarde said the inflation outlook looked uncertain due to the global environment. She saw potential upside risks to inflation, stemming from tariffs hurting demand for euro area exports and a stronger euro, while also flagging downside risks such as higher energy prices, steeper import prices, and a slower moderation in wage growth.
What is the ECB’s Rate Outlook? ECB’s Governing Council stated it would not pre-commit to a particular rate path but would base its rate decision on its “assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission.”
ING economists said, “As the last ECB rate cut dates back to June last year, it’s fair to say that the hurdle to cut again is very high.” However, the firm said this does not guarantee that the ECB is done with its easing. “Looking ahead, if the ECB were to leave its good place, any first move would be a cut, not a hike – at least in the near term.”
While believing that the first move from the status quo stance could be a cut, rather than a hike, ING did not preclude a hike either. “As long as the cyclical recovery of the eurozone continues, any inflation undershooting should not be mistaken for deflationary risks, but could still encourage more dovish ECB members to push for an insurance rate cut,” the firm said.
Takeaways for Futures Traders: The EUR/USD pair is likely to be stable or slightly weaker in the short term due to a dovish tilt. That said, the pair’s trajectory will also hinge on how the U.S. Federal Reserve conducts its monetary policy. In the near term, the euro could remain weak to stable against the dollar.
Futures traders can take light short positions in Euro FX Futures (6E) or brace for range trades, placing stop-loss orders near the pair’s recent highs. Keep an eye on any hawkish commentary from the ECB, which could support euro strength, as well as strong U.S. data that may weigh on the euro.
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