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ECB holds rates steady, expected to announce tapering plan next month

The European Central Bank kept interest rates steady, but reinforced money managers' expectation that tapering will be announced in October.

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 euro was hovering around $1.20 following a news conference held by the ECB. The euro was up 0.6% vs. the dollar since the U.S. market close Wednesday.

Mario Draghi, president of the ECB, said at a news conference Thursday that while the exchange rate is "not a policy target," it is important regarding growth and inflation in the eurozone, and resulted in the downward revision for medium-term inflation projections. Regarding the appreciation of the euro, Mr. Draghi added the ECB's governing council "will have to take into account this element … in our future policy decisions."

Changes were made to the ECB staff macroeconomic projections for the eurozone. Real GDP was revised upward vs. projections in June, to 2.2% for 2017, up from 1.9%. GDP growth forecasts for 2018 and 2019 were unchanged at 1.8% and 1.7%, respectively.

Inflation projections were held for 2017 at 1.5%, but revised downward for 2018 to 1.2% compared with 1.3% in the bank's June forecast; and to 1.5% in 2019, down from 1.6% in the previous forecast.

Money managers also highlighted the deferral of any decision on quantitative easing tapering to October. The governing council meets on monetary policy Oct. 26.

"While there has been a noticeable firming in growth across the region, inflation continues to disappoint on the downside, not helped by the recent strength in the euro, which will have a dampening effect," said Brendan Lardner, active fixed-income portfolio manager at State Street Global Advisors, in a reaction comment. "A tapering of the purchase program will have to take place from next year due to technical constraints … It appears when the decision to taper is made, policy accommodation will be withdrawn at a cautious pace that is heavily data dependent."

Regarding the impact of Mr. Draghi's comments on the currency, Patrick O'Donnell, senior investment manager at Aberdeen Standard Investments, said in a separate comment: "(Mr.) Draghi's probably done enough to slow the appreciation in the euro but not the path of travel, which is up. There's no question that the ECB is worried about the euro's appreciation, but there's little he can actually do about it. That's why the euro has rallied based on what Draghi has said: markets know there's only so much he can say." He added the ECB's plan to announce tapering plans next month was "widely expected by the markets."