Euro sinks as Draghi reveals cuts to euro zone inflation projections


The European Central Bank (ECB) has increased its forecasts for economic growth in the eurozone but kept interest rates on hold.

The bank said it expected to stick with the 0% rate "for an extended period of time", but its statement has now removed a suggestion that the rate could fall into negative territory - a prospect that few had thought would ever really happen.

The bank left its bond purchase stimulus program unchanged at 60 billion euros ($67 billion) per month through at least the end of the year and longer if necessary.

The statement that inflation remains weak supports the central bank's reluctance to announce an end to its bond-buying stimulus program or to raise interest rates from record lows.

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"We remove the interest rate bias because the tail risk on future path of inflation had disappeared", Draghi said.

Despite this, the ECB President, Mario Draghi said at his press conference that "deflation risks have definitely gone away".

The euro zone economy grew by more than previously estimated in the first quarter and at its fastest rate in a year, European Union statistics agency Eurostat said today.

The downgrade mainly reflected lower oil prices, Draghi said.

Its previous estimates put price growth at 1.4 percent this year, 1.7 percent the next and 1.9 percent in 2019.

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Mr Draghi said the recovery was due to a pick-up in investment and corporate profitability, gains in employment and the global recovery supporting trade and euro area exports.

The ECB's bond-buying programme at a rate of €60bn a month is particularly significant in maintaining monetary stability in view of political volatility in Italy, not to mention an ailing banking system overloaded with non-performing loans and regional banks.

The forecasts remain well below the central bank's inflation target of below but close to 2%, however, they were widely expected following a leak on Wednesday which preempted the plans. Right now inflation is at 1.4 percent in the year through May. "The pass-through of our monetary policy has never been so effective as it is today".

"If you ask me what I expect, I'd say based on the current assessment, the current information, I don't expect lower interest rates".

The euro, which weakened on Wednesday on reports that the European Central Bank would cut its inflation forecasts, was down 0.4 percent to $1.121, after dipping to $1.1196, its lowest since May 31.

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An unexpected upwards revision to the first quarter Eurozone gross domestic product also failed to boost demand for the Euro, given the ECB's persistent focus on inflation over other growth indicators.