The euro slumped and German bonds rallied after the European Central Bank assured investors that it expects to hold interest rates until at least through the summer of next year.
Policymakers, however, set an end date for their €2.6 trillion (Dh11.15tn) bond-buying programme. The ECB on Thursday said it was phasing out its bond-buying stimulus programme after the end of this year. The bank said after Thursday's meeting of its 25-member governing council that the purchases would be reduced to €15 billion a month from €30 billion euros from October and then wound up completely in December. The programme is credited with raising inflation to the ECB's target of just under 2 per cent. Inflation was 1.9 per cent in May, but the bank needs to be sure the higher rate will persist.
Money markets are now pricing in a 10-basis point increase to the deposit rate in September 2019, compared with 15 basis points on Wednesday.
Since the inception of its bond-buying programme in 2015, the ECB has ploughed billions of euros into the region’s debt markets. German bonds have been among the biggest beneficiaries, with yields dropping to record lows and even briefly falling below zero per cent. The central bank has held its deposit rate at minus 0.40 per cent for more than two years, having not raised it since 2011.
“Bunds are rallying, most likely due to rate outlook being tied in with sustainable inflation path,” said Orlando Green, a strategist at Credit Agricole SA. “The statement does look dovish but still in line with our call for the first hike coming in September 2019.”
In addition, the ECB cut its euro-zone GDP growth forecast for this year to 2.1 per cent from 2.4 per cent and raised its inflation forecasts for 2018 and 2019 to 1.7 per cent from 1.4 per cent
The euro fell 0.9 per cent to $1.1692, the lowest level in over a week. German 10-year yields dropped four basis points to 0.45 per cent. The Stoxx 600 index rose 0.4 per cent, while the Markit iTraxx Europe index of CDS on high-grade companies tightened about three basis points to about 66.7, the lowest level in nearly two weeks.
Expectations for an end-date to quantitative easing grew after the ECB’s chief economist Peter Praet signalled that Thursday’s meeting could be pivotal.