European Central Bank keeps interest rates on hold as growth picks up

American flag hangs on the front of the New York Stock Exchange hours after the market closed in New York. Technology and health care stocks are leading U.S. market indexes slightly higher in early

Market participants were turning their attention to ECB President Mario Draghi's press conference at 12.30 GMT, for the banks assessment of the euro area economy. "At the same time, the economic expansion has yet to translate into stronger inflation dynamics".

Sterling slumped by about 2 cents to $1.27 after the poll suggested May's Conservative Party would not win enough seats in Parliament to take office alone, a shock result that would plunge domestic politics into turmoil and could complicate Brexit talks. "A very substantial degree of stimulus is still needed" to support the economy. ECB President Draghi's remarks highlighted the optimistic tone of European data. That chimes with comments in the run-up to the meeting that policy makers must be extremely cautious in communicating amid a lack of convincing inflationary pressure. "We need to continue to accompany the recovery with our monetary policy".

The bank said that while growth is picking up, inflation is still well below the target.

But, inflation has been downgraded even more than leaked yesterday. The Bank expects inflation to average 1.5% in 2017, down from its previous forecast of 1.7%, and 1.3% and 1.6% in 2018 and 2019 respectively.

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The euro has risen against the dollar in the past five months, partly due to the greenback's weakness, but also on the view that rising inflation would prompt the European Central Bank to raise interest rates in early 2018. Intesa edged 0.7 percent higher and UniCredit gained 1.2 percent.

The bond purchases, made with newly printed money, are aimed at increasing inflation from its current annual 1.4 percent toward the central bank's goal of just under 2 percent. While unemployment is falling, it is still high, which is holding down wages and limiting price growth.

SEB Research comments on today's European Central Bank meeting in which the Governing Council left policy rates and the size of QE unchanged, and removed the interest rate easing bias but left its forward guidance unchanged in all other aspects.

"We still expect a compromise to be reached, implying more QE into next year, but at a reduced monthly pace", economists at Societe Generale said in a note before the rate decision. "Deflation risks have definitely gone away".

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The ECB also maintained its pledge to increase its asset purchases if necessary.

Contrary to our expectation the Governing Council postponed an exit strategy discussion, presumably to avoid a hawkish signal ahead of the summer recess.

A key aspect of Thursday's meeting will be whether the central bank forecasts a sustained upturn in inflation, especially the core inflation figure, which does not count volatile items like the price of oil and has been stuck at a weak 0.8-0.9 percent for a year.

Oil prices fell again on Thursday, with a sell-off continuing the day after data showed a surprise surge in USA crude inventories, and Brent settled at its lowest since November 29, the eve of an OPEC production cut deal.

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