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Euro falls after Draghi reaffirms outlook for low rates

After the European Central Bank, as expected, kept interest rates on hold, Draghi told reporters inflation uncertainty was receding, though he cautioned it was "too early to call victory".


Reuters Last Updated at 28 Jul 2018, 14:07 IST
Euro falls after Draghi reaffirms outlook for low rates
  • He also sounded an optimistic note on euro-area economic growth, saying it remained "solid and broad-based". (Image Credit: Max Pixel)

The euro fell, stocks extended gains and bond yields pulled off their highs on Thursday after ECB boss Mario Draghi reaffirmed a commitment to keep interest rates low "through" next summer, even though he saw inflation picking up by the end of the year.

After the European Central Bank, as expected, kept interest rates on hold, Draghi told reporters inflation uncertainty was receding, though he cautioned it was "too early to call victory".

He also sounded an optimistic note on euro-area economic growth, saying it remained "solid and broad-based".

The euro, which had inched higher following Draghi's optimistic comments on growth and inflation, eased to a session low of $1.16525 after Draghi reiterated interest rates would stay low for a while yet.

The single currency stood 0.55 percent down on the day, while European stocks extended gains after Draghi spoke to trade 0.8 percent higher.

Government bond yields, meanwhile, trimmed rises on confirmation of the low rate outlook.

"Markets are still focused on the rate guidance. It looks like he (Draghi) was trying to guide markets towards a rate hike from September onwards," said Marchel Alexandrovich, European financial economist at Jefferies in London.

"They are relatively confident on the recovery and I'm surprised that there was not more focus on the bullish comments on inflation."

Germany's 10-year government bond yield, the benchmark for the eurozone, was just 1 basis point higher in late trade at 0.40 percent. It briefly touched the day's high at 0.424 percent, which was on par with six-week highs hit earlier this week, after Draghi's inflation remarks.

Other 10-year bond yields in the euro area also trimmed earlier rises.

Draghi's comment cemented the bank's commitment to stick to the dovish pledge that had stunned markets at the bank's June meeting and lays to rest any belief that hawkish ECB policymakers could sway the board towards an earlier move.

Eurozone money markets fully price in a 10 basis point hike in the ECB's minus 0.40 percent deposit rate in October 2019, showing little change in pricing following the ECB news conference.

Stefan Legge, an economist at the University of St Gallen in Switzerland, predicted Draghi was likely to raise rates just before his term ends next October. He noted that purchasing managers' indexes this week had indicated eurozone growth flagging, pointing to the third-quarter growth of just 0.4 percent

"The ECB today factored in the recent PMI data that shows the economy is not doing so well that (it) warrants an earlier rate hike but also not so weak that it needs further action," Legge said.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)


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