The European Central Bank concluded that the sell-off in the region’s bond markets in the first quarter of the year wasn’t sufficient reason to change the course of monetary policy.
“It was widely felt that it was advisable for the Governing Council to look through recent financial market volatility,” the ECB said in a summary of the June 2-3 monetary-policy meeting in Frankfurt published on Thursday. “If there were factors that led to an unwarranted tightening of monetary policy or if the outlook for growth and inflation were to materially change, the features of the monetary policy programs in place would have to be reviewed. There was, however, no reason to do so now.”
ECB board member Benoit Coeure said at the council meeting that the slump in debt prices was probably due to a pick-up in the outlook for growth and inflation, as well as technical factors. At a press conference after the meeting on June 3, ECB President Mario Draghi said financial markets would just have to get used to higher periods of volatility, spurring a further fall in bond prices.
After a debt rally early in 2015 spurred by the market’s anticipation of the ECB’s 1.1 trillion-euro ($1.2 trillion) asset-buying program, policy makers are now greeting the reversal as a sign that their plan to boost inflation and growth is working. Since an intraday low of 0.049 percent, reached on April 17, the yield on German 10-year bonds has risen to about 0.88 percent.
Governing Council members agreed that “volatility could subside again as markets adjusted to the new market environment,” according to the accounts. “However, there were also reasons to expect that increased volatility would persist in an environment of low interest rates in which asset prices tended to be more volatile.”