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    ECB raises growth and inflation outlook but says risks remain on downside

    The European Central Bank met in Vienna today for its latest monetary policy meeting and as expected, kept interest rates and its asset purchase program unchanged. There were more details however on some of the policies announced in March but not yet implemented.

    The purchase of corporate bonds (corporate sector purchase program) will commence on June 8, while the new series of the targeted longer-term refinancing operations (TLTRO) will begin on June 22. The TLTRO program is aimed at boosting lending across the euro area with banks able to borrow from the ECB at zero or negative rates.

    Unusually for the ECB, there were upward revisions to the growth and inflation forecasts for 2016. Inflation across the Eurozone is projected to average 0.2% in 2016 instead of 0.1% as previously forecast. The central bank expects inflation to start rising in the second half of this year.

    Economic growth was revised up from 1.4% to 1.6% in 2016. The forecasts for 2017 and 2018 were largely unchanged. The ECB sees growth being supported by domestic demand but weakness in emerging markets and the sluggish pace of structural reforms are weighing on growth. Draghi appeared to deliberately highlight that the slow pace of reforms by national governments were prohibiting the full impact of the ECB’s measures.

    Despite the slightly more optimistic outlook, the ECB was quick to stress that although the risks have shifted to the upside, they remain broadly on the downside. The ECB also expects Eurozone growth to moderate slightly in the second quarter from the 0.5% rate seen in the first three months.

    As such, interest rates are likely to stay at present or lower levels for an extended period of time, according to the President Mario Draghi’s opening statement in today’s press conference. Draghi added that the bond buying plan could be extended beyond March 2017 but the ECB first needs to assess the full impact of the current measures, including the ones still to be implemented. The ECB expects that there will be additional stimulus to the Eurozone economy from the new measures that will come into effect later this month.

    Draghi was once again on the defensive of ECB policies arguing that the measures taken are proving effective and that the decisions taken in March helped avoid a “severe deterioration of financial conditions”. He also rejected some reports suggesting that there is a shortage of bonds in the market due to the central bank’s massive asset purchase program.

    However, Draghi admitted that core inflation has been weaker than expected and the ECB is keeping an eye on second round effects of the very low inflation levels. Apart from Germany, wage and price pressures are still non-existent in other Eurozone countries and the ECB would therefore need to maintain an appropriate degree of policy accommodation to ensure that inflation rises to close but below 2% without “undue delay”.

    In an unsurprising move, the ECB joined other international institutions in highlighting the risks to growth if Britain was to vote to leave the EU. Draghi said the ECB already has contingency steps in place, though he did not elaborate.

    The euro, which had been steadily advancing against the dollar and the pound ahead of Draghi’s press conference, fell back slightly towards the end of the press conference. The single currency peaked at 1.1219 dollars and 0.7775 pounds before easing to around 1.1170 dollars and 0.7730 pounds in late European trading as Draghi’s comments signalled that further easing is possible.

    There was also some activity with Greek government bond yields after Draghi stated that the ECB has yet to make a decision on whether to lift the waiver on Greek government bonds, following the recent deal reached between Greece and its creditors on its bailout program. Draghi said another policy meeting will be required before the ECB can decide whether to allow Greek banks to use Greek government bonds as collateral to borrow cheaply from the ECB. This pushed two-year Greek government bond yields to 7.457% from 7.357% before the comments.

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