Draghi remains dovish amid Greek default fears

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ECB president Mario Draghi announced that, despite improved inflation levels, interest rates on main refinancing operations and marginal lending facilities would remain unchanged, as negotiations on Greek debt continued.

Speaking after the monthly press conference following the meeting of the ECB Governing Council in Frankfurt, Draghi dismissed proposals to exit the ECB asset purchase programme earlier than anticipated.

Responding to rumours of a possible Greek default, Draghi stressed that he anticipated a full repayment of Greek bonds maturing in September, stating that he took Greek policy makers by their words.

Nevertheless, he acknowledged that if Greece would default on its IMF loans, the ECB would reassess Greek government bonds posted as a collateral for liquidity measures.

In response to Draghi’s speech, the value of the Euro briefly dropped to but rose quickly as German ten year bund yields jumped to 0.8%, German ten year bund yields reached the highest level since November 2014.

Yoram Lustig, lead fund manager at AXA Investment Managers, commented: “Draghi is indeed likely to reinforce the ECB’s commitment to its stimulus and quantitative easing (QE) programme at least until September 2016. Many market participants believe that QE in the eurozone is here to stay. The European economy is on a path to recovery, but it’s a fragile recovery. Draghi isn’t going to risk it [the recovery] by saying anything he shouldn’t or not saying anything he should. The eurozone needs reassurance from Draghi, particularly given the situation with Greece.”

Scott Thiel, deputy CIO Fundamental Fixed Income and head of the Global Bond Team at BlackRock  commented: “Thus far, most central bank action in 2015 has been on the loosening side but our base scenario remains that the Fed and Bank of England, which had both previously pursued QE programmes, will tighten their monetary policy stances this year. On the other hand, we expect the ECB and Bank of Japan to maintain their asset purchase programmes.”

Thiel added that BlackRock is currently short on the euro versus the Norwegian krone and long on the yen versus the euro.

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