ECB's Draghi still sees need for very substantial stimulus, but less worried

Rate-setters in Frankfurt stuck to script on Thursday, with chief Mario Draghi saying that underlying inflation remained low and was only expected to rise gradually, even while at the same time striking a more confident note on the economic outlook which gave lenders' shares a boost.

The ECB's policy analysis continued to point to a need for maintaining a "very substantial" degree of policy accommodation to secure a "sustained" return to price stability "without undue delay", Draghi stressed in his speech.

On the flip side, he said the risks to the outlook had decreased.

"The risks surrounding the euro area growth outlook have become less pronounced, but remain tilted to the downside and relate predominantly to global factors," he said.

To take note of, during the Q&A session he said he saw geopolitical risks as having risen. Despite that, he also observed that some of the risks which had been identified in the past - such as Brexit - had yet to generate economic consequences.

As of 1359 GMT euro/dollar was up by just 0.43% to 1.0587, a far smaller move than often accompanied ECB meetings, having hit an intraday high at 1.0611, as ECB policy-makers largely (and unusually for Draghi) met economists' expectations.

Curiously, the euro's strength versus the greenback was not replicated against the pound initially, with euro/gbp off by 0.15% to 0.8710.

The Stoxx 600 index of bank shares would close the session 1.11% ahead at 177.38, with Spanish and French lenders doing particularly well. Stock in Santander for one ended the day up by 2.45% alongside gains of 3.75% for BBVA.

By day's end, 10-year german Bund yields jumped six basis points to 0.43% (amid news that French presidential candidate Macron had overtaken his far-right rival Le Pen in another poll), even as two-year German government debt advanced, pushing yields down by one basis point to 0.85% - a bit of a contradictory move.

Draghi also made the point that the Governing Council had refrained from repeating a promise to use "all available tools" to keep financial conditions from tightening, reflecting "less urgency" in needing to be ready to forestall outright deflation.

Economists weigh in: French, German elections a factor

Commenting on Thursday's press conference, Claus Visten, chief Eurozone economist at Pantheon Macroeconomics surmised: "the bar for completely removing stimulus remains very high.

"Our expectation remains that the ECB will make a more decisively hawkish tilt at its June meeting, provided Le Pen does not carry the day in French presidential elections. Our base case is further that the pace of QE will be reduced to €40B a month from January 2018—to be announced in September—and that the deposit rate will be raised by 10bp in Q1 18."

Dr. Howard Archer, chief Eurozone + UK economist at IHS Markit chimed in saying: "There are signs that the ECB is starting to change its tone on monetary policy and inching towards a shift in its policy stance. At the moment though it is no more than baby steps.

"Given that the ECB has set out its asset buying programme until the end of the year, we suspect that it will consider making any adjustments until late on in 2017, very possibly waiting until the German election is out of the way in September."

Dr. Archer forecast the ECB would extend its asset purchases until 2018, but a reducing rate, while the main rates would remain steady throughout 2017 and 2018.

'Look-through' continues to be the watch-word

Critically, Draghi said the GC would continue to 'look-through' transient increases in inflation given that there were no implications for price dynamics over the medium-term, but it was confident that progress was being made.

That was despite a significant upwards revision by ECB staff to their 2017 euro area CPI projection to 1.7%.

On the other hand, in 2019, which marked the end of the central bank's forecasting horizon, CPI was seen standing at just 1.6%, well below its target of below but near 2.0%. In 'ECB-speak', that meant policy needed to remain easing.

Nonetheless, economists such as Vistesen believed the 2017 CPI projection was too bold, by assuming that food and energy inflation was 'transitory' and that it made little sense "given the empirical evidence of inflation in the EZ as a lagging indicator."

"We think this discrepancy in forecast could come back to bite the ECB later this year," Vistesen added.

Be that as it may, even that outcome required the full implementation of the ECB's policies, Draghi said.

Draghi also emphasised the need for greater reform efforts in all euro area countries in 2017.

Is criticism of Germany justified? No, it isn't

To a question from the assembled reporters regarding criticism of Germany's trade surplus from the White House, Draghi drily answered "there is no merit in attacking Germany".

"The currency of Germany is the euro [...] the exchange rate of the euro is determined my market forces [...] the exchange rate of the US dollar is off its historical average."

Draghi said the latter was the main culprit for its current level, which some observers, the White House in particular, deemed excessive.