The European markets have been roiled in recent weeks by the political drama in Italy as two populist parties forged a governing coalition. The return of eurozone political risk to the forefront of investors’ minds saw Italian bond yields spike, while the gap between German and Italian yields – a widely-watched indicator of political risk sentiment – rose sharply.
The markets are quiescent ahead of the ECB’s announcement, with the euro up 0.3 per cent at $1.1824, leaving its fall over the year to date at around 1.6 per cent. Italian government bond yields have edged upwards, reflecting some investor nerves. The two-year yield is up 11 basis points on the day to 1.071 per cent. The 10-year yield is up 10 basis points at 2.915 per cent. But they are still well off their peaks in late May at the height of the political uncertainty.
The ECB is also going to be updating its forecasts for the eurozone economy. If they do signal any plans to tighten policy, it will be interesting to see how they square that with recent data – which has been pretty soft since the last meeting in April. Inflation did come close to the 2 per cent target last month, but that was mostly due to the rise in oil prices, not to underlying price pressures.
The ECB has been buying €30bn of European bonds each month since the start of the year, down from €60bn a month last year. It has accumulated a significant proportion of the total market for eurozone sovereign paper, meaning that the question of when to bring the programme to an end is becoming increasingly pressing.
We are expecting the ECB press release at 12.45pm London time, followed by a press conference by ECB president Mario Draghi at 1.30pm. The ECB governing council is in Riga, Latvia, today. You can watch live here.
Claire Jones, the FT’s correspondent in Frankfurt, has put together an explainer telling us what to watch for. You can find that here.
Here is the last ECB announcement from April – this is what the fresh press release will be compared to:
The immediate question is whether the ECB will commit to ending its asset purchase programme – it is widely expected to cut purchases from the current level of €30bn a month in September to zero by the start of 2019.
But investors are watching for clues on when, and how fast, the ECB will start raising interest rates from historic lows. And they want more information on when the central bank might stop reinvesting the proceeds of QE, and so begin shrinking its balance sheet in a way that will tighten monetary conditions.
Hello and welcome to the FT’s live coverage of the ECB’s latest monetary policy decision and press conference. It will be one of the most closely-watched days in recent ECB history as the central bank mulls a withdrawal from quantitative easing later this year.