Added to this, Draghi downplayed the importance of the very low 5y5y inflation expectations as he said it could be hard to access the move in market based inflation expectations following the Brexit vote.
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Europe is enjoying a modest economic recovery but inflation of 0.1 per cent is abnormally low and unemployment is falling too slowly to make people in countries such as Spain and Greece feel good about the economy.
He called that asset-buying programme “quite successful” and confirmed it would run until March 2017, or beyond if necessary, until the European Central Bank sees an upward adjustment of inflation toward its target.
“The central bank will buy longer-dated bonds because they are the only ones left eligible”, Mizuho strategist Antoine Bouvet said. This comes against a background of both weak inflation and weak economic growth. A negative rate means banks must pay the ECB to park their cash and is created to encourage them to lend.
Lastly, on the issue of Italian banks, Draghi addressed risk from non-performing loans and the non-performing exposures in the euro area. This period is expected to go beyond the current horizon of the ECB’s asset purchase program.
Under the rules of the QE scheme, the European Central Bank must hold the largest proportion of bonds in German debt but the yields on these have collapsed in recent weeks.
“The sheer weight of the ECB’s presence could push 30-year bond yields to zero”, said Rabbani Wahhab, a senior fixed income portfolio manager at London and Capital.
Consumer prices in the euro area were projected to increase by an annual average 0.3 percent this year and then pick up by 1.2 percent in 2017 and 1.5 percent in 2018. Italian officials are locked in negotiations with European Union authorities over a possible €40 billion capital injection for Italy’s banks, whose stocks have been hit hard.
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“Much like the Bank of England, the ECB is likely to wait for post-Brexit data to be released before making any significant policy decisions with inflation, production and employment data crucial”. Visit MarketWatch.com for more information on this news. This includes the preparation of derivative works of, or the incorporation of such content into other works. For the protection of AP and its licensors, content may not be copied, altered or redistributed in any form.
