ECB keeps interest rates unchanged amid spiking inflation

The European Central Bank (ECB) reduced the size its bond-buying programme on Thursday (9 March) from next month, as it kept interest rates unchanged at zero in line with market expectation.

The bank also left its refinancing rate (the rate at which it lends money to commercial banks) and interest rates on the marginal lending and the deposit facilities unchanged at 0.00%, 0.25% and -0.40% respectively.

As previously outlined, the ECB will continue to make purchases under the asset purchase programme (APP), although this will drop from the current monthly purchase pace of €80bn (£69.3m, $85.4m) to €60bn from April.

Two years on since Europe's central bank began its bond-buying programme, the rate of inflation in the 19-country bloc has slightly exceeded the ECB's target of 2% for the first time since 2013. In turn, that has led to growing calls to reduce stimulus measures.

The latest decision is in line with the strategy the bank had outlined in January, when it said the net asset purchases are intended to continue at a monthly pace of €60bn until the end of December, "or beyond, if necessary".

If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the bank said it stands ready to increase the programme in terms of size and/or duration.

ECB President Mario Draghi will hold a press conference in Frankfurt at 1.30pm GMT.

Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said: "Markets will be looking for changes to whether the ECB still sees economic risks mainly tilted to the downside, and whether 'very accommodative policies are still needed' to safeguard to Eurozone recovery. We expect neither, and think that the statement largely will be a copy of the January address."

Jennifer McKeown, chief European economist at Capital Economics, added: "With growth apparently holding up well and headline inflation running ahead of the below-2% target, a few hawks on the Governing Council had suggested that it might be time to tweak the Bank's forward guidance on interest rates.

"Accordingly, we expect asset purchases to be tapered only gradually in 2018 and doubt that interest rates will be raised before the end of that year."