Asahi Associates - ECB Holds Rates At All-Time Low.

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Asahi Associates: With the coalition government in Portugal fractured and worries over Greece's ability to honor its obligations under the troika's bailout, bond yields in the eurozone have begun to rise.

Mario Draghi, the President of the European Central Bank, held interest rates at an all-time low as expected but investors are applying pressure on him to begin providing markets with forward guidance.

The central bank also left its other two rates - the deposit rate and the marginal lending rate - at zero percent and 1.0 percent respectively.

Last month, Draghi revealed that the ECB was in "consultations" on this issue with other European institutions such as the European Investment Bank (EIB) and the EU Commission.

But he acknowledged that the ECB's thinking on the issue was "very much at an early stage".

One of the main focuses of the meeting was the publication of the ECB's latest growth and inflation forecasts for the 17 countries that share the euro.

The ECB said the eurozone economy was now projected to shrink by 0.6 percent this year and then grow by 1.1 percent next year, whereas in March, it had been pencilling in a contraction of 0.5 percent for 2013 and growth of 1.0 percent for 2014.

"Incoming information has confirmed our assessment which led to the cut in interest rates in early May," Draghi explained.

Underlying price pressures were expected to remain subdued over the medium term and inflation was expected to remain within the ECB's definition of price stability, which is an inflation rate below, but close to, 2.0 percent.

"Against this overall background, our monetary policy stance will remain accommodative for as long as necessary," Draghi said.

€Forward guidance is essentially the practice of giving markets an idea of what your future decisions are likely to be,€ said an Asahi Associates strategist.

Markets have grown more skittish in recent weeks because of the US Federal Reserve's statement of its intentions to withdraw stimulus and bond prices in Europe have seen signs of a sell off as investors speculate that bond markets are over-valued.

An Asahi Associates strategist said, €News out of Europe on the debt crisis has been rather subdued in recent months but with the shock resignation of two key member s of the Portuguese coalition government and Greece's inability to keep its promises, the issue has been forced center stage again.€

€The last thing the euro area needs right now is rising bond yields so Mr. Draghi has his work cut out,€ he concluded.
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