ECB not preparing deposit rate hikes, monitoring euro

The European Central Bank does not appear to be eyeing hikes on the interest rate paid on its deposit facility next year, but is monitoring the exchange rate, its president said.

His remarks stood in stark contrast with forecasts from many economists who were expecting the ECB to further taper the pace of its bond purchases, or quantitative easing programme, in 2018, but to continue until them end of next year.

Hence, it appeared to follow that any hikes in the deposit rate would have to wait until 2019, whereas some economists were projecting a roughly 20 basis point increase in 2018, alongside the tapering of QE.

Speaking after the Governing Council's policy meeting on Thursday, its chief, Mario Draghi, twice read to journalists the paragraph contained in its policy statement which said: "Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases."

In what appeared to be an attempt to hammer the point home more clearly, he indicated that the "bottom line" was that the GC had not discussed changing the sequencing between further tapering of QE and deposit rate hikes.

Responding to another question, Draghi explained that what was discussed - among other matters - was the recent strength in the single currency.

Although the ECB does not target the euro exchange rate, it is "very important" for growth and inflation, he said.

Hence, the GC would need to take into account "that element" in the fall, when it would decide on the exact settings for its policy instruments for next year, in apparent reference to the size and duration of its bond purchases.

Indeed, in their introductory remarks at the press conference, Draghi and ECB vicepresident Vitor Constancio indicated that: "the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability."

As per previous guidance, which was repeated on Thursday, the ECB policy statement reiterated that QE was expected to continue at a monthly pace of €60bn until the end of December 2017, or beyond, if necessary.