To combat deflationary threats the key interest rate has been dropped from 0.15 per cent to 0.05 per cent, while the deposit rate fell from -0.1 per cent to -0.2 per cent. The ECB will begin buying ABS and covered bonds from banks in October.
Since the depths of financial crisis equity markets have bounced back although due to further strife in 2011, the eurozone market has been slower to recover than the US or UK. So how do the experts think assets will react to the latest moves from the central bank?
Performance of indices over 5yrs
Source: FE Analytics
Neil Williams, Hermes’ group chief economist
Williams says the bounce in markets will be temporary and will be followed by more extreme monetary policy measures.“Today’s ECB moves are a step in the right direction, but too little, too late to snuff out deflation-risk and kick-start growth. The further 10bp shavings off the refinancing and deposit rates are puny, and look more cosmetic than real.Any drop in the euro on the back of them would be welcome, but possibly short lived,” he said.
“These rates may have to be cut again - especially if the unfortunate conflict to the east causes an increasingly direct macro hit on Germany’s growth.”
He says that while the purchase of assets may help boost markets the volumes are currently small and any benefit is likely to be felt in northern Europe rather than the periphery.
“Far more useful would’ve been the ‘bazooka’ of unlimited sovereign QE, which was not fired today. But, Draghi’s clearly leaving his powder dry. His hesitancy to use all bullets reflects how empty the policy tool box is. With demand subdued and the likelihood at some stage of rising bond yields, the ECB will have to capitulate on QE.”
“The biggest test will be when global yields start to climb, probably in 2015. Given two-thirds of eurozone activity is long, not short-rate, driven, this will sap demand. Otherwise, the zone’s misery may be compounded by a stronger euro, doing nothing to allay fears that Japan is ‘leading the way’ in terms of deflation risk.”
Iain Stealey, manager of the JPM Strategic Bond fund
The manager says the move is positive news for eurozone risk assets and shows Draghi’s resolve to stop deflation but also signals a likely move into government bond purchases.
“Today’s moves further prove that Draghi knows the central bank cannot stand idly by whilst the economy slowly implodes. This is the first step in further monetary policy easing,” he said.
“Consider it an installment – there will be more. We do not know for sure in what exact shape or form, but the ECB is determined to raise demand, aid consumption and investment, and raise real growth potential in the eurozone.”
“The market was looking for a list of ingredients from the ECB including weaker growth expectations, weaker inflation forecasts and further information on the ABS programme. They got this wish list along with additional information of covered bonds purchases and surprise rates cuts which is really the icing on the top of the cake for investors.”
He says the move reinforces the view that peripheral government bonds remain more attractive than core government bonds.
“We remain broadly constructive on credit and are continuing to allocate to European high yield. Spread is attractive in relative terms and the credit quality is compelling. We’re seeing a lot of high yield rated companies being upgraded, which functions as a positive technical impact.”
Trevor Greetham, director of asset allocation at Fidelity
The move will have a muted effect on European markets, Greetham says, but all eyes will be on whether the ECB will embark on a full-scale quantitative easing programme involving the purchasing of government bonds.“Today’s policy changes aren’t enough to cause growth to come surging back in the euro area but things are looking brighter in the US where business confidence is strong and consumers are buying cars and houses once more,” he said.
“There is no further room to cut rates so the focus is now squarely on the liquidity injections and asset purchase programmes already announced. President Draghi kept the door open to sovereign bond purchases and he continued to talk the euro down by drawing attention to other central banks heading towards tightening.”
Martin Harvey, fixed income fund manager at Threadneedle
Harvey agrees that the move by the ECB signals the beginning of a wider programme of quantitative easing by the central bank.
“The ECB exceeded market expectations once again this month, highlighting both the commitment to anchoring inflation expectations, and also heightened concerns that market participants are losing faith after so many months of low inflation prints.”
However he says there is a question mark surrounding the feasibility of large-scale asset purchases but the policy commitment should be big enough to boost confidence in the ECB and therefore markets.
“For now, this policy should provide further solace to risk assets and a continuation of the recent ‘hunt-for-yield’ theme in fixed income markets, at least until we find out how quickly the balance sheet expansion occurs.”
