The European Central Bank's decision to leave interest rates unchanged came as little surprise. The broad consensus before the meeting of the bank's governing council in Frankfurt this morning was that there would be little or nothing of significance to discuss.

President Mario Draghi announced without any fanfare that the ECB's key interest would remain unchanged. The rates on the main refinancing operations and on the marginal lending facility and the deposit facility will stay at 0.00%, 0.25% and -0.40% respectively.

Rates will stay at these levels for an extended period of time, added president Draghi. This will be well beyond the planned end of the €60bn a month asset purchase or quantitative easing (QE) programme. This is currently scheduled to begin winding down in December this year.

It could be extended if circumstances require it. The medium-term outlook continues to be encouraging for a number of countries and sectors, said the ECB president.

Mario Draghi, courtesy of the ECB

Euro strengthening

The recent strengthening of the euro is presenting complications. President Draghi expressed a certain dissatisfaction with inflation figures and said that recovery remains dependent upon monetary policy. The exchange rate is not a policy target.

But it is important, he emphasised. “We will have to take this into account in our information set in making policy decisions,” he said. “Following the recent appreciation monetary conditions in the eurozone undoubtedly tightened but they remain accommodative.”

Consumption is doing well because of increased household disposable income, helped by low interest rates. Exports are also doing well, he added.

ECB not ready: State Street

Timothy Graf, courtesy of State Street

Timothy Graf, head of macro strategy for EMEA at State Street Global Markets said the comments from the ECB president confirm the central bank is not ready to offer any details on the end of non-standard monetary policies.

“Concerns over euro strength as expressed recently in unofficial channels are giving them pause for thought, as the recent rise in the single currency is likely to limit price pressures and keep inflation below target,” he noted.

“Even so, Draghi’s attempts to highlight and talk around the euro’s strength have only had the effect of pushing it higher.”

The importance of the lack of inflation

David Katimbo-Mugwanya, fund manager of the Amity Sterling Bond fund, EdenTree Investment Management, focuses on the lack of inflation. This remains firmly at the forefront of the ECB's thought process regarding QE guidance, he states.

“At this point, currency strength seems to have stayed the ECB’s hand, however, one gets the impression that inaction on its part is merely delaying the inevitable tightening and consequent market re-pricing,” he goes on.

“A decision on the future of QE is now expected to arrive in October.”

David Katimbo-Mugwanya, courtesy of Eden Tree

Distinctly unimpressed

Azad Zangana, Schroders senior European economist, sounds distinctly unimpressed in his reaction. “Overall, this month’s ECB meeting turned out to be a non-event,” he said. “Investors will now look forward to next month’s meeting for reassurance that the ECB will continue QE into 2018."

Looking for change

The ifo-President Clemens Fuest said ahead of the meeting that he favours a tapering off of bond purchases. “In light of the current data on inflation in the eurozone, it is becoming increasing clear that an exit strategy is needed”, he said.

“At its meeting this Thursday, the ECB should give a signal of this strategy to allow the financial markets to adapt. The announcement of a gradual reduction in purchases as of January 2018, provided the inflation trend does not reverse, would be such a signal.”

We have asked Mr Fuest for a reaction to the news and will communicate it as soon as he responds.