European Central Bank drops interest rate cut talk as Mario Draghi declares eurozone deflation risk over

'Deflation risks have definitely gone away,' said the ECB president at his regular press conference

ECB president Mario Draghi (AFP/Getty)

The European Central Bank sent a more hawkish signal to financial markets on Thursday as it dropped language from its regular statement suggesting that interest rates in the single currency area could go lower and also lifted its GDP growth forecast.

“It was not about what the ECB said but what it didn’t say,” said Carsten Brzeski of ING.

“This easing bias is now gone. The ECB’s official policy decision signals the ECB’s first baby step towards tapering [of its asset purchase programme]."

The official GDP growth projection for 2017 was increased by 0.1 per cent to 1.9 per cent this year. There was a similar upgrade to 1.8 per cent in 2018 and 1.7 per cent in 2019.

Eurostat earlier estimated that the eurozone economy grew by 0.6 per cent in the first quarter of 2017, up from 0.5 per cent in the final quarter of 2016.

The ECB also reduced its inflation projection to 1.5 per cent in 2017, down from 1.7 per cent previously, reflecting lower global oil prices rather than any change in underlying price pressures.

Eurozone headline inflation in May was 1.4 per cent, down from 1.9 per cent in April.

Core inflation was 0.9 per cent, down from 1.2 per cent previously.

The ECB's official target is just below 2 per cent.

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

Of the decision to drop a reference to rate cuts he said: "We didn’t have a vote but I didn't hear any dissenting voice by any governing council member."

Patrick O’Donnell at Aberdeen Asset Management said the easing bias removal was not a great surprise.

“There’s some tweaking to the language about the risks to the economy and the prospects for a rate move. But it doesn’t amount to much,” he said.

The euro weakened around 0.34 per cent against the dollar to $1.12167 after the press conference.

As expected, the ECB kept its main interest rates on hold again, with the refinancing rate at 0 per cent and the deposit rate at minus 0.4 per cent.

It also confirmed that it would continue with its €60bn per month asset purchase programme until at least the end of 2017 – and maintained the pledge to expand it if conditions deteriorate.

Analysts and traders have been speculating on when the ECB will begin to taper down the size of its monthly purchases.