(Reuters) - The euro jumped half a percent on Thursday, while bond yields and Italian bank shares rose after the European Central Bank (ECB) held off hinting at interest rate cuts and unveiled details of its cheap loans programme for banks.
Yields briefly fell when the statement was released but then rose, with Germany’s 10-year government bond a touch higher on the day at -0.22% off an earlier low of -0.24%..
The euro zone banking stocks index jumped 1.3%, while the euro rebounded as much as 0.5%, to the day’s high of $1.127
The ECB pushed back the timing of its first post-crisis interest rate hike and said it would continue paying banks to lend to households and businesses via its TLTRO programme.
But it refrained from signalling bolder steps, such as cutting rates or restarting its massive bond purchases, maintaining a recovery in inflation towards its target of just under 2 percent had simply been delayed, not derailed.
Money market pricing showed that investors now price in almost a 45% chance of a 10 basis point cut in ECB rates by the end of the year, down from a 75% chance before the meeting.
Analysts said the most dovish outcomes had not materialised and the TLTRO programme was less generous than hoped for.
“People believed it would be costless, but under the new scheme, banks that are not increasing their stock of loans would have to pay 10 bps over the MRO (main refinancing operation). It is not that much, but it’s creating incentives for banks to keep lending to the economy,” Natixis rates strategist Cyril Regnat said.
“Italian banks are the ones holding the biggest amount of TLTRO 2. But it will be harder to do carry trades with this TLTRO 3 because the cost is reducing the carry of short-dated BTPs.”
However, Italian banks rose 1.9% after the statement, as investors scaled back expectations for an ECB rate cut in the wake of the ECB statement.
Italian government bond yields were also higher on the day, having fallen to two-month lows ahead of the ECB meeting. Italy’s 10-year government bond yields were two basis points higher to a day’s high of 2.506%.
Credit Suisse said banks were being offered funding at minus 30 bps. “This is not the most bullish outcome, but still positive,” it said.
Investors remain keenly trained on the outcome of Italy’s dispute with the European Union over its budget.
Bond yields rose sharply earlier in the week after the European Commission concluded that Italy is in breach of EU fiscal rules because of its growing debt, a situation that justifies the launch of a disciplinary procedure.
Italy needs a big deficit correction for this year and next to avert a European disciplinary procedure over its deteriorating public finances, European Commission Vice President Valdis Dombrovskis told La Repubblica daily on Thursday.
Reporting by London Markets Team; Writing by Sujata Rao; Editing by Dhara Ranasinghe and Andrew Cawthorne