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Draghi's pledge on low interest rates hits euro, lifts bonds

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The euro fell, stocks extended gains and bond yields pulled of their highs on Thursday, after ECB boss Mario Draghi reaffirmed a commitment to keep interest rates on hold "through" next summer.

[LONDON] The euro fell, stocks extended gains and bond yields pulled of their highs on Thursday, after ECB boss Mario Draghi reaffirmed a commitment to keep interest rates on hold "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, Mr 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 Mr Draghi's optimistic comments on growth and inflation, eased to a session-low of US$1.16725 after Mr Draghi reiterated interest rates would stay low for a while yet.

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The single currency stood 0.45 per cent down on the day, while European stocks extended gains after Mr Draghi spoke to trade 0.6 per cent 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, the benchmark for the euro zone, was flat at 0.39 percent, having 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 gave up earlier rises to trade mostly flat on the day .

Mr 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.

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

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

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

REUTERS