ECB Keeps Policy Unchanged as Euro Gains Risk Curbing Inflation

(Bloomberg) -- The European Central Bank maintained its pledge to move slowly in removing euro-area stimulus, setting the stage for President Mario Draghi to face questions on the strength of the single currency.

Policy makers reiterated that they’ll continue buying 30 billion euros ($37 billion) of assets a month until at least the end of September. They kept interest rates unchanged and repeated that they expect borrowing costs to stay at present levels until well past the end of net bond purchases.

They also repeated their pledge to step up or extend the program if needed, and stressed that additional support will come from their policy of reinvesting maturing debt. Attention now turns to Draghi’s press conference at 2:30 p.m. in Frankfurt. The euro was little changed at $1.2404 at 1:57 p.m.

Read real-time analysis of the ECB meeting in our TOPLive blog here.

The ECB’s first policy decision of 2018 comes after the euro surged to its strongest level against the dollar in more than three years. U.S. Treasury Secretary Steven Mnuchin this week endorsed a weaker greenback, noting that it bolsters the nation’s trade.

The main challenge for ECB policy makers is that the euro’s gains have the potential to weigh on inflation, which the central bank forecasts won’t reach its goal before at least the end of 2020. That raises the prospect that the Governing Council will warn volatility is a source of uncertainty that requires monitoring.

That wording was last used in September after a 14 percent gain since the start of the year -- and prompted the euro to weaken over the next two months.

The base case is that Draghi says something to limit the euro’s rise, said Ned Rumpeltin, head of foreign-exchange strategy at Toronto-Dominion Bank. “If he fails to do so, then he’ll be sending a strong signal that they’re endorsing the euro’s rally and effectively green-lighting a further advance.”

Calls to move ahead with plans to unwind the stimulus ahead of the meeting have helped push the currency higher. Executive Board member Yves Mersch and Governing Council members Jens Weidmann and Ardo Hansson have all said the ECB should recognize that the euro area’s strongest expansion in a decade will eventually boost inflation.

Even Executive Board member Benoit Coeure, one of the key architects of quantitative easing, said he saw a “reasonable chance” the latest extension to September would be the last. An account of the Governing Council’s December meeting showed that governors agreed their policy guidance could be reviewed early in the year.

Economists surveyed by Bloomberg don’t expect policy makers to start making changes to their guidance until March, with an end-date for asset purchases announced by June.

--With assistance from Brian Swint Jana Randow Alessandro Speciale Fergal O'Brien Zoe Schneeweiss Catherine Bosley Alexander Kell Angela Cullen Kristian Siedenburg Andre Tartar Craig Stirling Carolynn Look Jill Ward David Goodman Lucy Meakin Gelu Sulugiuc Iain Rogers and Charlotte Ryan

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Zoe Schneeweiss

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