The European Central Bank removed a promise to buy more bonds if necessary from its policy guidance, taking a step toward withdrawing its historic monetary stimulus after boosting its growth forecasts, but said monetary policy needed to stay loose to ensure that inflation moved toward its 2% target.
The euro jumped following the statement, but retraced its gains to trade down 0.81% at $1.2310 by 3:10 p.m. New York time after digesting comments by ECB President Mario Draghi. While the ECB dropped a promise to increase its asset buying program if economic conditions got worse from its monetary statement, it retained a commitment to reinvest the principal payments from maturing securities for as long as necessary.
The ECB staff boosted their forecast for 2018 eurozone GDP growth to 2.4% from the 2.3% predicted at the December meeting, but eurozone inflation fell even further below the 2% target to 1.2% in February.
"Overall, an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term," Draghi said in his introductory remarks, although he noted that the new staff forecast "confirms the strong and broad-based growth momentum in the euro area economy, which is projected to expand in the near term at a somewhat faster pace than previously expected."
The central bank's asset buying program — running at €30 billion a month until September 2018, and possibly beyond — would continue "until the Governing Council sees a sustained adjustment in the path of inflation," Draghi said, noting that, while measures of underlying inflation have moderated due to "special factors," they should rise gradually in the near term.
The change in language did not come as a surprise, economists at Dutch bank ING said in a research note.
"Even after dropping the easing bias, the ECB still has all options to extend QE," they wrote, predicting that the central bank would extend the asset buying program at least one more time past September.
"It's another baby step forward toward changing the forward guidance," said Paul Mortimer-Lee, chief market economist for BNP Paribas.
Central bank officials are likely to discuss when they might stop buying assets at their June meeting, Mortimer-Lee said, "but we don't expect movement on interest rates until the middle of next year."
As expected, the ECB left its key rates unchanged at this meeting, with the main refinancing rate at zero percent, the marginal lending facility at 0.25% and the deposit facility at -0.40%.
Draghi stressed that interest rates would not go up until "well past the horizon of our net asset purchases."
While the economic backdrop is improving, Draghi said President Donald Trump's intention to impose tariffs in imported steel and aluminum could prompt retaliation and ignite a trade war with negative effects for confidence.
"If you put tariffs against your allies, one wonders who the enemies are," Draghi said, noting that imposing trade barriers without going through normal multilateral processes could endanger global growth.
"Unilateral decisions are dangerous," he said.
The impact of any wave of new trade tariffs on monetary policy would also partly depend on their impact on exchange rates, Draghi said.
In the past when the U.S. threatened to impose tariffs, the dollar would appreciate, he said, adding: "but things can be different from time to time."
"If all we're talking is tariffs on steel and aluminum and that's it, it's not that big a deal for the general macro economy and implications for monetary policy," said Jay Bryson, global economist with Wells Fargo Securities.
"If it develops into a full-blown trade war, that could have serious consequences," he added.
