With inflation still so low, most investors expect the European Central Bank to extend its bond-purchase program, known as quantitative easing, before it ends in March.
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While German bonds declined during the press conference, the 10-year yield remained below zero, and within a range seen in the previous two days.
The ECB lowered its growth and inflation targets for the euro zone, with real GDP expected to increase by 1.6 percent in 2017, compared with 1.7 percent in June.
A key market measure of long-term inflation expectations in the euro zone – the five-year, five-year breakeven forward rate – meanwhile rose to nearly 1.32%, up from two-month lows hit earlier this week below 1.26%. That was largely expected and will be at 0.00% (main refinancing operations), 0.25% (marginal lending facility) and -0.40% (deposit facility).
But credit analysts at banks including Citi, HSBC, Bank of America Merrill Lynch, BNP Paribas and JPMorgan and investors such as Pimco all say the €1.6tn programme is fast approaching a wall, perhaps as early as this year. He said the ECB Governing Council had not discussed the option of “helicopter money”, which involves the central bank printing money and distributing it directly to citizens, and they had not talked about share purchases either.
“A lot of attention is focused on the buying of sovereign bonds and the challenges facing the European Central Bank”, said Rabbani Wahhab, senior fixed income portfolio manager at London and Capital.
In his effort to underline governments’ responsibilities, Draghi read from this week’s joint statement issued by the Group of 20 most advanced nations in which they said they were ready to use “all policy tools – monetary, fiscal and structural” to improve growth.
He did, however, hint there could be more in future by confirming the Bank was studying how it might potentially change its asset-buying programme, which is also known as quantitative easing.
Growth in the region slowed to 0.3 per cent in the second quarter after the economy expanded 0.5 per cent in the three months through March.
“Meanwhile, Eurozone consumer price inflation was only stable at 0.2 per cent in August with core inflation edging down to 0.8 per cent from 0.9 per cent”. A purchasing-managers survey by IHS Markit signalled economic activity in the 19-nation bloc was at its weakest in 19 months.
At the ECB’s last policy meeting in July there were no changes made to that package but the bank’s president, Mario Draghi, had said his staff would “continue to monitor economic and financial market developments very closely”.
Responding to a crescendo of criticism from lenders about low or negative rates cutting into their profits, Draghi pleaded for patience to give the ECB’s unprecedented stimulus of low rates, cheap loans to banks and a huge injection of liquidity a chance to work.
“Interest rates have to be low today for being high tomorrow”.
The ECB said it would leave interest rates “this low or lower for a long time”.
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