The European Central Bank held eurozone interest steady Thursday, with money managers surprised at the more dovish tone of President Mario Draghi.
The central bank's governing council kept the interest rate on the main refinancing operations of the eurosystem, which provides the bulk of liquidity to the banking system, at zero. Overnight credit for banks, known as the marginal lending facility, was kept at 0.25%; while the interest rate on the deposit facility, which banks in the region may use to make overnight deposits, was held at -0.4%.
The ECB reiterated its target of inflation at close to but below 2%, that the asset purchase program will run to December or longer if necessary, and that the governing council is ready and willing to do more if it is deemed necessary to help reach the inflation target.
Mr. Draghi, speaking at a news conference, said the governing council of the ECB recognizes the need to be "persistent, and patient … and prudent" in terms of the continuation of its policies.
"Basically inflation is not where we want it to be, and where it should be. Now we are still confident that it will gradually get there, but it isn't there yet. And that is why the governing council reiterated the forward guidance, the asset purchase program, the interest rates and all this package of monetary accommodation, and reiterated that the present, very substantial monetary policy accommodation is still necessary," said Mr. Draghi.
He added: "But let me just make clear one thing — after a long time we are finally experiencing a robust recovery, where we only have to wait for wages and prices to follow course to move toward our objective. Now the last thing that the governing council may want is actually an unwanted tightening of the financing conditions, that either slows down this process or may even jeopardize it." That is why the governing council reiterated it has the flexibility to take action to help meet its objectives.
"After a recent flirtation with more upbeat rhetoric, the dovishness of (Mr. Draghi) and company comes as a surprise," said Timothy Graf, head of macro strategy at State Street Global Markets, in a reaction statement. "Below-target inflation always meant tight policy was a long way off, but some hint of extraordinary easing measures coming to an end was a reasonable expectation given the strong tone to eurozone data."
Aberdeen Asset Management senior investment manager Patrick O'Donnell said in a separate statement: "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. He was at pains to stress that finical conditions are still supportive of higher inflation. This is his way of endorsing the rise in bond yields and the appreciation in the euro that happened after his (June 28 speech in Sintra, Portugal). Yet he has stopped short of actually doing anything material."
