July 18, 2019 / 12:27 PM / 5 months ago

RPT-UPDATE 1-Euro and bond yields fall on report that ECB might amend inflation goal

(Updates with context, more details; repeats to more subscribers)

By Dhara Ranasinghe and Abhinav Ramnarayan

LONDON, July 18 (Reuters) - The euro and government bond yields across the single currency bloc fell on Thursday, following a report by Bloomberg News that European Central Bank staff are studying a potential change to the bank’s inflation goal of ‘near 2%’.

The report quoted sources as saying ECB staff were studying the bank’s approach informally, including whether a more flexible target might be more appropriate in the post-crisis era - potentially allowing inflation to stay higher for a certain time.

“The euro inflation story is a bigger driver for the euro as it potentially opens the door for ECB stimulus policies to continue for longer,” said John Marley, senior consultant at FX risk management specialist, SmartCurrencyBusiness.

The ECB has failed to meet its inflation goal for years and recent dovish comments from the central bank suggest it is gearing up again to cut rates and possibly even renew asset purchases to fight stubbornly low price growth and the headwinds created by a global trade war.

Analysts said Thursday’s report had fuelled market speculation that an ECB rate cut cycle would be longer and deeper than expected.

The euro briefly fell to the day’s lows of $1.1205, down 0.13% on the day, as the report circulated in markets.

By 1150 GMT, it had recovered and was trading flat on the day at $1.1226.

In bond markets, the report sparked a further downward lurch in government borrowing costs — especially in southern Europe, viewed as the biggest beneficiary of further ECB easing.

Spanish, Italian and Portuguese 10-year bond yields were down 5-8 basis points on the day .

The yield on Germany’s benchmark 10-year government bond fell 3 bps to minus 0.32%, taking it back toward record lows hit earlier this month.

The benchmark euro zone equity index hit its high for the day at 379 points at 1030 GMT, from around 376 points before the headline. It was down 0.2% at 1150 GMT.

The rally in Italian bond markets got a further push from the prospect of snap elections that could see a business-friendly centre-right coalition come to power.

Deputy Prime Minister Luigi Di Maio said the far-right League, his allies in the coalition, had to decide whether they wanted to quit the coalition or keep it going.

The 10-year bond yield fell to as low as 1.506%, its lowest in almost three years, while the gap over German Bund yields hit its tightest in over a year at 181.60 bps .

Tensions between the League and di Maio’s 5-Star Movement have increased this week after the League voted against Ursula von der Leyen as the new president of the European Commission, but 5-Star backed her candidacy.

“Any sense of an election in Italy is positive for Italian BTPs because investors think that the League could jettison the 5-Star Movement, leaving Italy with, on paper, a more business-friendly, centre-right government,” said Richard McGuire, head of rates strategy at Rabobank.

additional reporting by Saikat Chatterjee and Josephine Mason; Editing by Kevin Liffey

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