Pressures mount on Draghi ahead of ECB policy conference

Ahead of next week’s ECB policy meeting, pressures are mounting on Mario Draghi to respond to current low inflation levels.

Draghi acknowledged the challenges at a press conference earlier this week, where he argued that the main cause of low inflation is the rise of the Euro artea exchange rate as well as processes of relative price adjustments in certain Euro area countries.

Meanwhile, Belgium, the first country to report its CPI figures for May, logged the lowest inflation rate in four years, dropping 400 basis points since 2001. Moreover, Germany reported an unexpected rise in the seasonally adjusted jobless rate by 24.000 to 2.905m, rather than an anticipated reduction of 15.000.

Steen Jakobsen, Chief Economist and CIO at Saxo Bank argued that Draghi is expected to announce a reduction of repo rates by 10 pbs, negative deposit rates of minus 10 bps, and the introduction of targeted lending programmes to SME’s.

At the same time, demand for fixed income assets increased in anticipation of further stimulus measures being announced next week. Yields for 10 years sovereign bonds dropped to a new low. Spanish yields declined by 19 basis points over the last month, German yields declined by 11 points over the last month, and Greek by 14.

According to Jakobsen “Negative rates a repo cut would be futile as measures to reactivate growth, initiate reform and boost consumer demand but…. Action by policymakers is better than inaction.”

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