Investment Clock insights

ECB takes further action


Ian Kernohan

10 March 2016

Having been stung in December by disappointing market expectations, it was important that Mr Draghi did not make the same mistake twice. Since then of course, we have had a major spike in financial market volatility, a fall in eurozone inflation, some weakness in the main eurozone business surveys and cuts to global growth forecasts. Today’s announcement more than met expectations for policy easing: a cut in the refi and deposit rates, a €20bn increase in monthly Quantitative Easing purchases, purchases of corporates bonds and a new Long Term Refinancing Operations (LTRO) arrangement. The addition of non-bank corporate bond purchases and the new LTROs, where borrowing can be as low as the deposit rate, were perhaps the main surprises. The initial reaction of markets was pretty clear, the Euro fell sharply and equities rallied. Draghi’s comment at the press conference that he thought further rate cuts were now unlikely reversed this initial reaction, however looking through these very short-term reactions, the proof of the pudding will be a rise in eurozone inflation expectations and a further pick up in lending growth.

With the US Federal Reserve (Fed) set to increase interest rates later this year, central bank divergence and our “Fed lone hiker” scenario is still our central case. This has led us to favour both eurozone and Japanese equities, on the back of expectations of easier policy. With the European Central Bank’s colours now nailed to its mast, it’s over to the Bank of Japan not to disappoint. We also look for another Fed hike to push both the Euro and Yen lower.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.