Draghi said that although he expects the measures already in place to ‘work their way through to the economy’ and contribute to a return of inflation to close to 2%, the ECB is committed to also using unspecified ‘unconventional instruments’ if necessary.
The Italian also offered some loose forward guidance on interest rates, saying that the present 0.15% level will be maintained for ‘an extended period’.
Related to this, is a new move to push ECB monetary policy setting decisions back to six week intervals from January instead of the present four weeks.
The central bank also announced further technical details of the targeted longer-term refinancing operations (TLTRO) first communicated on 5 June. Banks will initially be able to borrow up to 7% of a specific part of their loans in September and December windows.
Subsequently, additional borrowing in further TLTROs will be made available depending on eligible lending activities versus bank-specific benchmarks.
Controlling the strength of the European single currency is a key aspect of the ECB’s strategy but Draghi was light on specifics in this regard.
“When questioned on the level of the euro, Draghi noted that they pay great attention to the exchange rate because it is very important for their outlook and for maintaining price stability,” said Scott Thiel, deputy CIO of fundamental fixed income at BlackRock. “It is not, however, a policy target,” he added.
Thiel said that his team is now roughly neutral in the European periphery having taken profit on overweight positions. “We are cognisant not only of the recent spread compression for peripheral European government bonds but also the switch in market focus from fundamentals to ECB support in the Eurozone,” he noted.
The latest developments do not change BlackRock’s ‘long-standing preference’ for being overweight subordinated European bank debt as it expects TLTROs and the potential ABS purchases to be positive for European banks.
