The European Central Bank gave no signs Thursday it is ready to wind down its monetary stimulus despite an economic rebound in the eurozone, opting to soothe financial markets ahead of the second round of France's presidential election.
The ECB's decision to stand pat comes at a tense time for the currency union, which is navigating a series of major elections as well as uncertainty in its relations with its two biggest trading partners, the U.S. and U.K.
At a news conference, ECB President Mario Draghi welcomed evidence of economic recovery but said policy makers hadn't discussed reducing their stimulus, which includes subzero interest rates and a EUR60 billion-a-month ($65.34 billion) bond-purchase program.
Mr. Draghi also hit back at recent criticism of the ECB from Germany's finance minister, Wolfgang Schäuble, who urged the central bank last week to start exiting easy-money policy.
"It's pretty ironic to hear these comments from people who supported the independence of central banks," Mr. Draghi said.
Investors were left trying to "square the circle" between the ECB's cautious stance and mounting optimism about the area's economy, said Lena Komileva, chief economist with G+ Economics in London.
The euro jumped almost half a cent against the dollar following Mr. Draghi's positive assessment of the economy, but later pared its gains as the ECB chief indicated policy would remain unchanged for now.
Echoing the ECB's caution, Sweden's Riksbank surprised investors earlier Thursday by extending its bond-purchase program by six months through the end of the year, albeit at a reduced level, despite strong economic growth.
As the eurozone economy strengthens, pressure has been building on the ECB to consider a change of direction, especially in the area's largest economy, Germany. Within the ECB, policy makers are divided over how quickly to start winding down their EUR2.3 trillion bond-purchase program, known as quantitative easing, which is scheduled to run at least through year-end.
But Mr. Draghi highlighted a number of potential economic threats, ranging from the details of Brexit and U.S. President Donald Trump's economic policies to tensions in North Korea.
"We shouldn't think that it's over," Mr. Draghi said of the economic fallout of Brexit. "It's quite clear that even now this uncertainty about the length and the shape [of Brexit] is producing economic consequences."
Another risk to the outlook is the French presidential election May 7. Pro-European Union candidate Emmanuel Macron was the top finisher in Sunday's first round, and faces far-right candidate Marine Le Pen in the runoff. A victory for Ms. Le Pen would send shock waves through financial markets, given that she has called for France to leave the eurozone. Polls suggest, however, that Mr. Macron will win the head-to-head race.
While Mr. Draghi said the ECB didn't base its policies on likely election outcomes, he acknowledged that political uncertainty played a part in the bank's calculations.
Recent economic data for the eurozone have been robust. Business confidence has risen to a six-year high, unemployment is at a seven-year low, and inflation is approaching the ECB's target of just below 2%. Fresh inflation data Friday will show exactly how close the ECB is to achieving its goal.
Crucially, though, core inflation -- excluding volatile energy and food prices -- has languished below 1% for months.
Mr. Draghi said none of his colleagues believed the stronger economy had affected the outlook for inflation. "As growth perspectives improve, the probability of tail risks may go down, but we are not there yet," he said.
The ECB repeatedly has ramped up its QE program since launching it in March 2015, most recently in December. That activism is reflected in the bank's swelling balance sheet, which, at $4.5 trillion, is set to surpass that of the Federal Reserve next week.
Some investors "are likely to be a bit disappointed with the ECB's continued unwillingness to think about tighter policy," said Tim Graf, a strategist at State Street Global Markets.
One reason for the euro's weakness on Thursday, analysts said, was Mr. Draghi's description of the likely end of the bank's stimulus. Some investors have speculated that the ECB could raise interest rates before ending its bond-purchase program, contrary to its current guidance, but Mr. Draghi suggested that was unlikely.
Despite the lack of action, analysts suggested that the ECB would use its next meeting, on June 8, to shift its assessment of the economy in a more positive direction. That could lay the groundwork for a move to start winding down QE, possibly in September.
Thursday's meeting was a "baby step" toward the end of the ECB's stimulus, said Mike Bell, global market strategist at J.P. Morgan Asset Management in London.
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(END) Dow Jones Newswires
April 27, 2017 15:12 ET (19:12 GMT)