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Eurozone interest rates kept unchanged ECB warns stimulus programme still has a way to run
(about 3 hours later)
Eurozone interest rates have been kept unchanged by the European Central Bank (ECB), as expected, with the benchmark rate remaining at 0%. The European Central Bank (ECB) has insisted there is still a long way to go before it can call a halt to its economic stimulus programme.
Attention now switches to ECB president Mario Draghi's news conference, at which he will explain the decision. ECB president Mario Draghi threw cold water on speculation that the bank might wind the programme down soon.
Markets will be scrutinising his comments for any signs as to a change in the ECB's stimulus policies. The bank is still buying 60bn euros (£53bn) of bonds a month as part of its quantitative easing (QE) programme.
The bank is currently buying 60bn euros (£53.3bn) of bonds a month as part of its quantitative easing (QE) programme. The ECB also kept the key interest rate for the countries that use the euro currency unchanged at 0%.
Last month, Mr Draghi said that the ECB would continue with its bond-buying programme, adding that it would be "in the market for a long time". Mr Draghi said: "After a long time we are finally experiencing a robust recovery, where we only have to wait for wages and prices to follow a course towards our objective.
However, there has been speculation that the bank might soon begin to signal a winding down of the programme. "The last thing the governing council wants is an unwanted tightening and for conditions that may either slow down this process or even jeopardise it."
The bond-buying programme, together with ultra-low interest rates, was designed to fend off the threat of deflation hitting the eurozone. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said: "The comment on inflation which is sticking in our head is Mr Draghi's notice to markets that: 'We are not there yet.'"
That threat now seems to have receded. The inflation rate in the eurozone was 1.3% in June, although it remains below the ECB's target of close to, but below, 2%. Last month, Mr Draghi's speech in Sintra in Portugal was interpreted by many economists as meaning the eurozone's economic recovery would allow QE to end and for interest rates to rise.
Patrick O'Donnell, senior investment manager at Aberdeen Asset Management, said: "This is a well-choreographed attempt by Mr Draghi to make sure that financial markets don't get ahead of themselves after his more hawkish comments of late."
The QE bond-buying programme, together with ultra-low interest rates, was designed to encourage lending and fend off the threat of deflation in the eurozone.
Mr Draghi said the policy had been a success: "We have created in the last three years six million jobs, much more than any time before the crisis in the same amount of time.
"All the economic sentiment indicators and survey indicators are either at all time highs or close to them so the policies have been successful."
However, the inflation rate in the eurozone was 1.3% in June, down slightly from 1.4% in May, some way below the ECB's target of close to, but below, 2%.
Mr Draghi said: "Measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as domestic cost pressures, including wage growth, are still subdued. Underlying inflation in the euro area is expected to rise only gradually over the medium term."
Aberdeen Asset Management's Mr O'Donnell said: "We probably won't hear anything significant out of the ECB until September, which is plenty of time for investors to digest Mr Draghi's caveat laden hawkishness.
"Mr Draghi will be hoping that today's performance is enough to give him a quiet summer."