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FTSE shrugs off Draghi's 'monetary policy on the cheap'

FTSE shrugs off Draghi's 'monetary policy on the cheap'

The FTSE shrugged off any disappointment at the European Central Bank's decision to keep interest rates unchanged at 0.25% and not embark on any extreme monetary policies such as 'quantitative easing' (or printing money) despite fears of deflation in the eurozone.

Markets had expected Mario Draghi to sit on his hands, and the ECB president duly delivered, despite inflation having fallen to 0.5%, well below the bank's target of just under 2%. The FTSE 100 traded at 6,659, unchanged on the day.

Draghi did however signal the ECB could take action if the situation worsened. 'We will monitor developments very closely and will consider all instruments available to us,' he said, leaving the door open to stimulus action.

'We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required. Hence, we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time.'

Trevor Greetham of fund group Fidelity Worldwide Investment said Draghi was enacting 'monetary policy on the cheap' and was aiming to 'talk down the euro without actually doing anything'. The euro fell to $1.3711, a loss of 0.4% on the day, following Draghi's news conference.

'There’s still a fairly high threshold to action in my view,' he said. 'The ECB knows that shoring up the euro area is unfinished business and systemic risk could rise again. Starting quantitaive easing when growth is good and confidence is high wastes the possible usefulness of such an announcement during a time of stress.'

Will he, won't he? All eyes on Draghi

10.38: The FTSE edged higher as investors awaited the results of today's European Central Bank (ECB) meeting, adding just 11 points, or 0.2%, to 6,670.

The ECB is meeting this lunchtime against a backdrop of slowing inflation in the eurozone, sparking fears over deflation. Inflation fell to a lower-than-expected 0.5% in March, down from 0.7% in February.

However, the market is not expecting a change in policy from the ECB, in spite of comments from Bundesbank president Jens Weidmann last week that quantitative easing in the eurozone was not 'out of the question'. A Reuters poll of 22 money market traders found 18 thought there would be no change of policy, while a survey of economists last week showed only two of 72 thought the ECB should take action.

Focus will instead turn to ECB president Mario Draghi's comments at this afternoon's press conference. Draghi is expected to reassure the markets that the ECB could and would take action if needed, but that this is not necessary yet.

'As a minimum many investors are looking for at least something from the ECB today, even if it's nothing more than a line in the sand, a condition of some sort that has to be met before easing can occur - or, to give it is more fashionable term, forward guidance,' said Angus Campbell, analyst at FX Pro. 

Fresh all-sector Purchasing Managers Index (PMI) figures for the UK meanwhile pointed to sustained economic growth, despite falling to a nine-month low of 58.1. In these surveys a reading above 50 separates growth from contraction. Chris Williamson, chief economist at Markit, said the figures signalled GDP growth of at least 0.7% for the first quarter of the year. 'Growth may weaken from here, but only modestly with no sharp easing in sight,' he said.

Tullow Oil (TLW.L) jumped 36.5p, or 4.8%, to 789.5p, after UBS analyst Jon Rigby upgraded the miner from 'neutral' to 'buy'.

Kingfisher (KGF.L) rose 9.6p, or 2%, to 440.8p after the home improvement retailer entered into exclusive negotiations to buy French rival Mr Bricolage in a £230 million deal. Freddie George, analyst at Cantor Fitzgerald, retained his 'hold' rating for the stock and kept his target price of 400p following the news. 'Mr Bricolage looks a compelling acquisition for Kingfisher and will strengthen its number one position in the French DIY market,' he said. 'However, in view of the size of the acquisition, we believe the company will have difficulties in getting anti-trust clearance, a process that is likely to take at least a year to conclude.

Insurers posted modest gains, with Standard Life (SL.L) up 0.6% at 391.6p, Aviva (AV.L) up 0.6% at 490.4p and Legal & General (LGEN.L) up 0.7% at 213.3p. According to the Financial Times, institutional investors are considering taking legal action against the Financial Conduct Authority after the City regulator botched its announcement of a review of insurers' historic sales last week, causing a slump in their shares. 

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