(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 EUR= ,
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 ES10YT=RR IT10YT=RR
PT10YT=RR .
The yield on Germany's benchmark 10-year government bond
fell 3 bps to minus 0.32% DE10YT=RR , taking it back toward
record lows hit earlier this month.
The benchmark euro zone equity index .STOXXE 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% IT10YT=RR ,
its lowest in almost three years, while the gap over German Bund
yields hit its tightest in over a year at 181.60 bps
DE10IT10=RR .
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.
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(additional reporting by Saikat Chatterjee and Josephine Mason;
Editing by Kevin Liffey)