ECB 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 ended 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. The short end of the euro curve reacted with increases of 1-2bp in both Euribor contracts and the Eonia market.
Regarding concerns over scarcity of bonds, Draghi argued that these were premature and to illustrate the 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 30Y Italy yield has dropped 7bp, and both 10Y and 30Y Germany are hitting new lows, of 12bp and 55bp, respectively, but this also follows the UST rally on weak US industrial production data released during the press conference.
Draghi repeated the ECB will look through unexpected inflation outcomes and, regarding when purchases might be halted, maintained the focus was on a sustained increase in inflation. Although he said the reaction function has not changed, 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, in our view.
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, in our view, 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. In our view, the extension should not be seen as the ECB searching for more bonds to purchase, as it was planned that the initial list could be amended, see link .
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