Mario Draghi, president of the European Central Bank, announced measures that were bolder than many expected: cutting its main interest rate to 0% from 0.5%; reducing its deposit rate from -0.3% to -0.4%; and a material stepping up of its Quantitative Easing programme, with a €20 a month increase in its asset purchase programme.
“This should be well received by the equity markets, which love the sugar rush of ever more liquidity, while weighing on the euro currency,” said Jason Hollands, managing director of Tilney Bestinvest.
“Whether it benefits the real economy is another matter altogether, as scepticism is growing over the effectiveness of QE as a policy tool. Where it has been introduced, QE has been very supportive to asset prices but arguably has resulted in a misallocation of capital from the real economy.”
No indecision
Joshua Mahony, market analyst at IG, believes that this time Draghi has delivered although it remains to be seen if it will make a difference to the eurozone economy:“The hesitancy and indecision that has pervaded financial markets this week was a reflection of the mistrust that has grown of whether the ECB will ever truly deliver upon the expectations Draghi creates.
“However, today we have seen the ECB truly out-deliver expectations with a package of monetary easing measures that span across the whole range of tools at the committee’s disposal. There was no indecision this time around; given the deterioration in inflation, manufacturing, consumer sentiment and financial markets in the past three months, such a drastic shift is justified, yet unexpected nonetheless.”
Euro
The market reaction to the move has been relatively predictable, with the euro tumbling over 1% and DAX up 1.50% in the immediate aftermath. The big question is whether this will be enough to build drive bullish momentum for the coming weeks in a bid to end the stock market downturn that has dominated 2016 so far.
“There is a big difference between market and economic response to any monetary policy decision and ultimately this round of easing will be judged down the line by the ability of the eurozone to finally exit the downturn of recent years,” said Mahony.
“With downward revisions to growth and inflation in 2016, there is a lot to do for the eurozone project to get back to strength and only time will tell whether these measures make any real difference to the eurozone economy.”
Has Draghi done enough?
So, has Draghi done enough? Adrian Lowcock, head of investing at AXA Self Investor, is not so sure and believes any rally following the announcement will be short-lived.
“The cut in deposit rate to -0.4% was widely expected and will not come as surprise to the market. Persistent weakness in the eurozone economy and a China slowdown has meant that markets were already anticipating much of what has been announced,” he said.
“There has been a clear loss of momentum in Europe’s recovery, in addition political risk remains a concern for the region. With valuations above their long term averages we favour defensive investments in the region and believe any rally following today’s announcements might be short lived.”
Implication for UK rates
Calum Bennie, savings expert at Scottish Friendly, believes there may be implications for the UK and next Thursday’s UK interest rate decision: “This cut by the ECB is the last thing hard-pressed savers in the UK want to hear.
“Ultimately, it is likely to impact on the UK base rate which will be reflected in lower savings rates at home.
“The day of zero interest rates on savings could soon be upon us. For younger savers with a long term perspective, now could be the time to dip their toe in the water and put a regular amount in a stocks and shares ISA, although risk is attached.”
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