The euro hit its highest level of the day after ECB president Mario Draghi said that the central bank had raised its forecasts for growth and inflation for the next two years, and also revealed there had been a “cursory” discussion about tweaking forward guidance.
He pointed out that the ECB’s statement had been changed to signal a lower “sense of urgency” around easing monetary policy.
We had not an intense but a cursory discussion about whether to remove the word ‘longer’ from the forward guidance.
It is not a dramatic choice but in the end, given the fact we can’t get say we are there with a self-sustaining inflation rate we prefer to keep this option in the language.
At publication time the euro was up 0.4 per cent against the dollar for the day, compared to a gain of around 0.15 per cent before Mr Draghi began his regular press conference.
The ECB president stressed the slow increase in core inflation, but said the risks to growth in the economy had improved since its last forecasts in December.
European sovereign bonds also slipped as Mr Draghi answered reporters’ question. Yields on 10-year Bunds, which rise when prices fall, had already risen around 1 basis point (0.01 percentage point) before Mr Draghi’s speech, but were up 4 basis points at publication time. France’s benchmark 10-year bonds also wiped out their earlier gains, to be flat on the day.
Patrick O’Donnell, an investment manager at Aberdeen Asset Management, said:
Draghi has ever so slightly opened the door to changing their policy stance. He’s done this by saying that the Governing Council talked about changing the language about where rates are in their monthly statement, but didn’t actually change it. This is effectively him signalling that something might change in the future, just not today.
It’s a classic Draghi technique of saying something that will move markets without actually doing anything. Due to this, and a wordy response to a question about raising rates before QE ends, markets will now start to recalibrate on the assumption that the ECB will remove accommodation towards the end of the year.