A headline rate cut to 0.05% and an asset purchase programme – asset-backed securities and covered bonds – dubbed “private quantitative” easing is certainly a step in the right direction. Still, this alone is unlikely to stave off the threat of deflation, and economists in the main remain unimpressed.
For Neil Williams, chief economist at Hermes Group, 10bp shavings off the refinancing and deposit rates are “puny” and “cosmetic”. And while the private asset purchases may help, he says again the amounts are small with benefits more likely for Germany, France and Italy, rather than peripheral Europe.
“Far more useful would’ve been the ‘bazooka’ of unlimited sovereign quantitative easing (QE),” he remarks.
“But, Senor 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.”
Not done yet
Still, while QE may not be an option right now, the ECB is clearly not yet done with easing.
For Brenda Kelly, chief market strategist at IG Group, the jury is still out as to whether any additional liquidity can meaningfully find its way to the broader economy.
She says: “Draghi continues to insist that loose monetary policy on its own is pointless – it will only have the desired effect if accompanied by structural reforms and fiscal policy. If history is anything to go by, this will be another area fraught with procrastination amongst certain member states.”
Elsewhere, Simon Ward, chief economist at Henderson, believes the ECB surpassed expectations for this month’s meeting; though he adds the central bank is probably on hold until at least December to assess the effects of its various easing measures since June.
“Henderson’s view, based on an analysis of monetary trends, is that eurozone economic news will improve in late 2014, quelling calls for QE,” he says.
“If not, President Draghi is in a quandary, since today’s news suggests that sovereign bond purchases remain a step too far for the Governing Council.”
The market reaction
So what does this all mean for markets? In terms of fixed income, Iain Stealey, manager of JPM Strategic Bond Fund, sees this week’s announcement as reinforcing the view that peripheral government bonds remain more attractive than their core equivalents.
He adds: “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.”
From an equities perspective, Tilney Bestinvest, believes the ECB’s latest measures should be supportive for markets, particularly at a time when the US and UK are expected to begin tightening over the coming months.
The firm’s preferred equity funds in the region are Threadneedle European Select, Henderson European Focus, Baring Europe Select and Standard Life European Equity Income.
