“Following the UK’s referendum, financial markets have weathered the spike in volatility with encouraging resilience”, Mr Draghi said. Draghi did not rule out increasing European Central Bank stimulus at the next meeting in September if Brexit starts to impact the eurozone’s economic outlook.
Advertisement
The euro rose and eurozone stocks were steady after the decision.
The British pound has been under pressure from the dollar and euro for weeks. Germany’s 10-year bund yields were largely flat, at around minus 0.04%. Italian banks are neck-deep in non-performing loans, with official data putting the total at around 200 billion ($220.5 billion), or around 8% of total loans.
“If warranted to achieve its objective, the governing council will act by using all instruments within its mandate”. Draghi will want to reassure markets that the bank remains in a stable position to provide the necessary assistance to markets and are ready to act when required.
However, on Thursday he said that the forecasts should be treated with a “grain of caution” because it will depend on negotiations between Britain and the European Union and the outcome of those talks. As always Draghi will comment on the considerations underlying the council’s decisions, but what is likely to be most keenly watched are his comments on the economic impact of Brexit on the eurozone.
The ECB left its key interest rates unchanged for a third straight session on Thursday.
Ten-year yields across the euro zone opened some 2 basis points lower on Friday, while two-year yields were broadly higher, according to Tradeweb.
Aside from the technical aspects, any perceived delays to monetary easing could depress future inflation, making longer-dated debt look more attractive and creating a phenomenon known as “curve flattening”.
The main rate – which is used by countries across the eurozone – is now at an historic low of 0 per cent. Our call is that the QE programme will be boosted temporarily to EUR100bn for the rest of 2016 and that the programme will be extended until September 2017.
The pound’s plunge after the Brexit vote saw £40 million in currency swing against the group, and confidence amongst holidaymakers has already been impacted by weakness in the sterling. Under the program, the European Central Bank now buys 80 billion euros ($88 billion) in bonds a month. Investors are becoming increasingly anxious that it may soon come up against a scarcity of bonds to buy, given that many government issues have yields below the minimum, which is set at minus 0.4%. But on Thursday, Draghi appeared calm about it.
Advertisement
The bank’s benchmark rate for lending to banks is zero.
