ECB Monetary Policy: Draghi pushes the decision making to October

Summary:

• ECB keeps key rates unchanged and maintains QE at 60 billion euro

• Draghi signals tapering decision to come at the October 26 monetary policy meeting

• Markets ignore Draghi’s remarks on the euro exchange rate

• Inflation could remain a wild card that will directly influence ECB’s decision making

• GDP growth revised higher to 2.2% for 2017. Inflation revised lower to 1.2% for 2017

It seems like no news is also good news for the common currency. Despite the hawkish expectations building up to the September ECB monetary policy meeting, ECB president Mario Draghi seemed to have played his cards well.

The ECB kept the interest rates unchanged and maintained its QE purchased at 60 billion euro. The central bank also gave some fresh forecasts as it revised its GDP forecasts to 2.2% in 2017, up from 1.9% GDP growth that it previously forecasted.

The central bank, however, cut inflation forecasts as it projected that consumer prices would remain around 1.2%, slightly down from 1.3% projections that were made previously. The downside revision to inflation came as Draghi said that the inflation could slow as a result of a stronger exchange rate.

Despite citing concerns about the appreciation in the euro, the markets continued to prefer holding the common currency as it once again tested the $1.205 levels last week.

The ECB's statement did not change much from its June monetary policy meeting. It was during the press conference that Draghi signaled that the central bank could announce its plans for reducing the bond purchase program.

However, this is expected to happen only after the current bond purchase program ends in December 2017. By doing so, the ECB will become the second G7 central bank to taper its quantitative easing purchases. The Federal Reserve was the first, and the central bank is already underway to begin offloading its bond purchases that started after the global financial crisis of 2008.

During the press conference, Draghi said that policy makers discussed plans for reducing the stimulus program. He said that officials would most likely decide at the October 26 meeting on "calibrating" the bond purchases for next year.

The markets are expecting that Draghi and team will reduce the QE purchases by another 20 billion euro, to bring its QE program to only 40 billion euro. Still, a lot remains unsaid as Draghi said "We are studying what to do next year. Judging by the way the work is going, we should be ready." There was little said about the central bank's exit plan which is likely to come up in the discussions.

The ECB is also under considerable pressure, especially from Germany. The ECB's monetary policy has been one of the widely talked about the subject as the nation heads to polls later this month.

Officials from Germany have maintained that they prefer to see a more "normal" monetary policy. It was only earlier this year that Draghi met with law makers to defend the central bank's "easy" monetary policy. Netherlands is another country in the eurozone whose law makers have become concerned with the ECB's policies.

Echoing similar views from other central banks, inflation continues to remain a wild card that could potentially shift the views and also influence monetary policy decision. Despite the fact that the ECB will take a decision on tapering in October, officials have expressed concerns that further evidence of inflationary pressures is required in order to make a confident decision.

The Eurozone's inflation rate has edged slightly higher to 1.5% as per Eurostat’s flash inflation estimates. This has been a considerable increase compared to just earlier this year when consumer prices remained stuck at levels near 1%.