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Markets prepare for rising rates as Draghi recalibrates

When rates start to rise, the big action will be in credit markets. Banks are already staffing up amid efforts to unfreeze the market structure and make it easier to take on and lay off risk


Mario Draghi stuck pretty much to the script sell-side analysts and buy-side economists had already written for him.

On October 26, he extended the European Central Bank’s bond-buying programme to September 2018 – or perhaps even further – but with net monthly purchases to be cut from $60 billion to $30 billion. There was not even a ghost of a smile when he called this recalibrating instead of tapering.

Operating in full on-the-one-hand up, on-the-other-hand down mode, Draghi expressed confidence that inflation will return to the ECB’s target of just under 2%. Just don’t expect that to happen soon: the ECB forecasts inflation of just 1.5% for 2019.

He cautioned that the ECB will continue to re-invest proceeds from maturing securities long after net purchases end, while yet boasting that the ECB’s latest data and survey results point to unabated growth momentum in the second half of this year and that recent sentiment indicators could point to further positive surprises.

Market participants take as much of this on board as they are predisposed to.

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