Saturday 26 May 2018

Draghi dismisses fears of another asset price bubble hitting Eurozone

Mario Draghi, president of the European Central Bank (ECB), stands as he departs a news conference following the bank's interest rate decision, at the ECB headquarters in Frankfur
Mario Draghi, president of the European Central Bank (ECB), stands as he departs a news conference following the bank's interest rate decision, at the ECB headquarters in Frankfur

Gretchen Friemann

Mario Draghi, the head of the European Central Bank, yesterday described prime commercial property valuations in certain areas of the Eurozone as "stretched" but played down concerns the ultra-loose monetary policy risked inflating another asset price bubble.

Dismissing fears of a systemic threat to the economy, he pointed out that the rampant levels of borrowing which fuelled the financial crisis in the previous decade remain absent.

He said "credit remains subdued all across the board".

Mr Draghi also cast aside worries about the long era of low interest rates on residential property.

While Mr Draghi conceded that some cities in the region are witnessing price increases, he said the speed of this trend varied within each country and across the Eurozone as a whole.

He argued that the right response to house price growth is marcro-prudential measures by local governments rather than an adjustment in rates for the single currency zone.

His comments followed a meeting of the ECB's Governing Council, which left base interest rates for the single currency on hold and deferred any decision on how to taper the €2 trillion bond-purchasing programme, known as quantitative easing, until next month.

Mr Draghi's remarks sent bond and currency markets in opposing directions, with the euro spiking against the US dollar while benchmark yields fell across the Eurozone.

According to Ryan McGrath, head of fixed income at Cantor Fitzgerald, the ECB head's dovish rhetoric may accompany more "hawkish action" as he prepares to trim QE.

"I think we can expect this tone of rhetoric from Mr Draghi for some time," said Mr McGrath.

Alan McQuaid, chief economist of Merrion Capital, said Mr Draghi's conundrum is how to avoid talking up the currency but still pare back QE.

A rising currency dampens inflation. The ECB wound back its predictions for inflation in 2018 to 1.2pc next year from 1.3pc and Mr McQuaid predicted that if the euro continues to strengthen, a reduction in QE is likely to be far more shallow than initially anticipated.

But continued stimulus should result in a benefit to Ireland's exchequer.

The National Treasury Management Agency (NTMA) is set to conduct another bond auction next week, likely to be a dual tranche, given the organisation's recent track record.

Mr McGrath claimed investors will pay negative rates once again if the notes mature in less than six years.

This means investors are effectively paying the government to hold Irish bonds.

But while Ireland can avail of unprecedented low borrowing rates, the ECB's policy is also exacerbating the currency moves.

Mr Draghi described the stronger euro as a "source of uncertainty which requires monitoring".

Brendan Bane, head of customer treasury services at AIB, attributed the surge in the euro/dollar as partly down to the ECB's moderate inflation adjustments.

"It was not material," Mr Bane said, and partly due to factors weighing on the US dollar, including the devastating Hurricane Harvey and the North Korean crisis.

However Mr Bane argued the euro was unlikely to breach the 1.24 level to the dollar, predicting it would remain within this bandwidth in the short-term.

Yet Philip O'Sullivan at Investec warned the key danger was in the euro/sterling volatility and argued too many Irish exporters remain exposed to currency swings.

Irish Independent

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