- ECB president Draghi gives a balanced message …
- … stressing that the ECB’s purchase programme has to be fully implemented
- Weak US industrial production data outweighs the impact of the ECB on the euro
Mr Draghi struck a balanced tone yesterday. He said that the full implementation of the ECB’s policy measures would “provide support to the euro area recovery and bring inflation rates towards the ECB’s target of below, but close to, 2% in the medium term”. Meanwhile, he refused to speculate about a tapering of asset purchases or an early exit. He stressed that the measures had to be “fully implemented” to get the desired results, repeating that the “asset purchases are intended to run until the end of September 2016, and, in any case, until we see a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates at the target in the medium term”.
Bond purchases proceeding smoothly …
With regard to the impact of the programme, Mr Draghi mentioned that the purchases were proceeding smoothly, with volumes in line with the announced EUR 60bn per month. Moreover, there is “clear evidence that the policy measures are effective”. He said that “financial market conditions and the cost of external finance for the private sector have eased considerably and borrowing conditions for firms and households have improved notably”. The central bank expects the economic recovery to “broaden and strengthen” gradually. The risks to the eurozone economy remain to the downside, but have become more balanced.
… and the ECB has no worries about bond scarcity
The ECB was not worried at all about the scarcity of government bonds. An increasing amount of bonds are currently having a yield of below the ECB’s deposit rate of
-0.2%, which excludes them from the purchase programme. However, Mr Draghi stressed that the ECB does not see any problems with regard to scarcity. In any case, “the programme is flexible enough to be adjusted when needed”. Still, according to Mr Draghi, lowering the deposit rate to below its current level was not an option.
Trends in inflation will be watched
When assessing the programme the ECB will “concentrate on trends in inflation, looking through unexpected outcomes in measured inflation in either direction if judged to be transient and to have no implication for the medium-term outlook for price stability”. Mr Draghi will probably have to put this message across more strongly later in the year and in 2016. We expect economic growth to beat expectations in coming quarters. In addition, inflation is likely to rebound, as the downward impact of energy prices dissipates.
Government bonds rally further
Government bonds rallied as Mr Draghi vowed that the ECB would continue with its purchases until a sustained adjustment in inflation would be reached. Government bond prices received another push when the central bank president downplayed the likelihood of scarcity. The yield on the German 10y government bond momentarily touched the 11bps threshold. Furthermore, 10s30s flattened and the yield spread between German bonds and peripheral bonds tightened.
ECB expands agency names on shopping list
While Mr Draghi assured that the likelihood of bond scarcity is exaggerated, the ECB decided to expand its shopping list of agency names. Without giving any further details, the ECB added 11 names to its list. Of these, 4 agencies are located in France and 3 in the Netherlands. The Dutch names are FMO, NWB and BNG. The expansion of names means that the ECB is no longer adhering to its collateral rules for its asset purchases. Under its collateral rules, which were used to determine whether a bond would be eligible for the PSPP programme, these names were regarded as credit institutions and not agencies. The ECB announced that the shopping list can be expanded further.
No significant impact on the euro
Draghi clearly indicated that it is premature to start speculating about an exit of QE. Initially the euro fell under pressure and moved towards 1.0580. However, weaker-than-expected US industrial production data outweighed the impact of the ECB on EUR/USD. As a result, EUR/USD moved above 1.07.