- ECB’s president Draghi had a slightly dovish stance at today’s ECB meeting where the most important message was ‘the QE programme must be fully implemented to work’.
- Added to this, Draghi killed the debate about cutting the deposit rate further, as he twice during the Q&A session clearly said, that the ECB will not cut the deposit rate. As the option is now out of the question, the short-end of the euro curve reacted by increases of 1-2bp in both Euribor contracts and Eonia market.
- Regarding scarcity of bonds, Draghi argued that these concerns were premature and to illustrate this point, he argued the ECB is only ‘1K into its marathon’ when it comes to implementation of the QE programme.
- The EUR govie market has reacted immediately with a broad based rally led by the periphery. The yield in 30Y Italy has dropped 7bp and both 10Y and 30Y Germany is hitting new lows of 12bp and 55bp, respectively, but also following the UST rally from the weak US industrial production released during the press conference.
- Draghi repeated the ECB will look through unexpected inflation outcomes and maintained the focus on a sustained increase in inflation regarding a halt to the purchases. Although Draghi said the reaction function has not changes, our interpretation is that the ECB focuses more on core inflation and that it will accept an increase in inflation if it is driven by higher oil prices. There is still too much slack in the labour market for wage growth and core inflation to increase.
- Regarding the economic outlook Draghi repeated that the risks remain on the downside, but he added a more hawkish comment as he also said ‘the risks have become more balanced and have diminished’. But this should not result in a halt of the purchases as the ECB’s projection is based on full implementation of the QE programme.
- Note the ECB has expanded its list of agencies whose bonds are eligible for purchases under the QE programme. The extension should not reflect the ECB is searching for more bonds to purchase, as it was planned that the initial list could be amended.
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