Draghi used his latest news conference on Thursday to insist that his support package was “effective” while promising there was more ammunition left to deploy if inflation refuses to budge upwards.
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Draghi had his usual stern words for the structural reform efforts of the region’s governments, saying they needed to be “substantially stepped up” to raise productivity, improve the business environment, and boost infrastructure. That sparked a selloff across the region’s government-debt market, where yields on $3.3 trillion of securities that comprise the Bloomberg Eurozone Sovereign Bond Index are now negative. No change would result in a “de facto” deviation from the capital key in Germany, Finland, Portugal and Ireland, causing “tapering” in these countries, while increasing purchases in other countries (according to the capital key).
The lack of action was despite still subdued eurozone growth and a risky outlook, for which Draghi said the UK’s vote to leave the European Union was partly responsible. The decision to leave rates on hold was expected by nearly all 70 analysts polled by Reuters but a sizable minority also expected an extension of the asset buys, now set to wind down next March.
Disappointment at the European Central Bank’s failure to deliver more stimulus at a meeting on Thursday weighed on euro zone bond markets from the outset. Nevertheless, some economists reckon that the European Central Bank will still have to extend its asset purchases for at least six months beyond the current March deadline.
The European Central Bank held its record-low interest rates unchanged Thursday, a spokesman said, as analysts expected the bank to wait for a clearer picture to emerge of the Brexit impact before making any drastic policy changes.
Analysts said the indication that tweaks in the bond-buying programme were on the way helped explain the sell-off in Germany – where the bulk of purchases for the quantitative easing programme are made.
The central bank’s 25-member governing council also left its benchmark rate at zero and its rate on deposits from commercial banks at minus 0.4 per cent.
The euro gained ground after Draghi’s comments, hitting a two-week high of $US1.1326 ($A1.4817) before paring gains to trade up 0.15 per cent at $US1.1254. On the ECB’s side, they continued to expect the economic recovery to proceed at a moderate but steady pace at just 0.3% of real GDP growth in the euro area in Q3 2016. The Fed is widely expected to hold off on raising interest rates this month following a string of disappointing data releases, including subpar jobs numbers for August.
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Inflation forecasts are unchanged at 0.2% in 2016, 1.2% in 2017 and 1.6% in 2018, he said. That indicates it sees itself getting gradually closer to its goal of just under 2 percent over the longer term.
