ECB meeting: no new signals – bond sell-off continues

The ECB meeting provided little news and the introductory statement was broadly unchanged from mid-April. However, bond yields continued higher on Mario Draghi’s comments despite his continued signal of full QE implementation.

Regarding the sell-off in the fixed income markets, Draghi had clearly prepared an answer to this question and listed a number of reasons why bond yields had risen. Eventually, he concluded ‘we should get used to periods of higher market volatility’.

This clearly removed any belief the ECB may be concerned with the sell-off and was accompanied by another fierce rate increase of 10bp in 10Y Germany. The move reflects the market expecting Draghi to deliver some sort of comforting words that he did not deliver. German rates are leading this move, with other fixed income markets such as the periphery mirroring the movement (i.e. unchanged spread to Germany after the meeting – and tighter over the past 36 hours on the improved pace of the Greek negotiations).

According to Draghi, the Governing Council has not discussed a QE exit plan as the ECB still has a long way to go in terms of reaching its inflation target despite the latest positive surprise in inflation.

Related to this, the ECB revised its inflation forecast up to 0.3% from 0.0% in 2015 but kept the projections for 2016-17 unchanged, implying it expects inflation to increase to 1.8% in 2017. The core inflation forecast was also broadly unchanged, although the ECB revised its projection for wage growth to fall by 0.3pp in both 2015 and 2016.

Draghi was asked a number of questions about Greece but started out by refusing to comment on the creditors’ proposal sent to Greece, as the negotiations are ongoing. Draghi continued to refuse to respond on what the ECB intends to do if Greece misses a payment.