Draghi’s QE announcement – the expert views

23rd October 2015

Mario Draghi, the president of the European Central Bank has stunned markets by signalling that he may boost quantitative easing and cut record low interest rates as the embattled Eurozone copes with falls in global growth.

The value of the euro dropped sharply on foreign exchanges, as the ECB said it had discussed expanding its €1.1tn (£795bn) bond-buying programme and cutting the rate on reserves held at the central bank.

Draghi said: “While euro area domestic demand remains resilient, concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation.”

We bring you a round up the expert opinion below

Draghi’s force of personality may be winning case for more QE

Russell Investments Head of Currency and Fixed Income Strategy, Van Luu

“Draghi surprised markets yesterday with the prospect of adjusting the central bank’s quantitative easing programme in size, composition and duration at its December meeting. It is a clear indication that Draghi’s force of personality has convinced the more reluctant members of the governing council to do away with their concerns and reload the bazooka.

“In essence, the ECB president fired the starting shot for the theme of policy divergence between the US and the euro zone to reassert itself in the currency markets. We don’t want to stand in the way of that and reduce our position on the euro from positive to neutral on the prospect of more and/or longer quantitative easing as early as December.

“The risk is that while the ECB has made a rhetorical dovish shift it doesn’t follow up with concrete action in December. For example, it is conceivable that the staff projections in December will be more benign than currently expected and the need for further action diminishes as financial markets continue to stabilize. However, while we do acknowledge this risk, we think that the ECB has nearly committed itself to doing more quantitative easing. In our view, only a substantially weaker euro and/or a major positive surprise in incoming data will convince them to hold off.

Money presses to roll again as currency markets hit with a double expresso

David Lamb, head of dealing at the foreign exchange specialists FEXCO

“Mario Draghi’s extremely dovish comments hit the currency markets like a double espresso – jolting them out of the torpor with which they had greeted the ECB’s decision to hold interest rates.

“No decoding was required – this was an uncharacteristically clear statement of intent. The ECB is still deeply concerned about the threats to the Eurozone’s patchy recovery, and is planning to announce more QE before the end of the year.

“It’s not even a shift from ‘if’ to ‘when’, but ‘how much’. Such a strong signal that the European money presses will be set rolling again soon has sent the Euro slumping.

“The Greek crisis may be temporarily on hold, but there remain plenty of clouds on the Eurozone’s economic horizon – and with the prospect of more Euros flooding onto the market, the single currency is rapidly losing the gains it made in October.”

Preference for Portuguese and Slovenian debt as healing continues

Marilyn Watson, Head of global unconstrained product strategy in BlackRock’s fixed income business

“With only two months left, all of the action spurring the major central bank monetary policy divergence that so many people expected in 2015, ourselves included, has been firmly on the easing side. The ECB certainly remains in the easing camp. It has maintained its refinancing rate at 0.05% and the deposit rate at -0.2% but, significantly, President Draghi noted that the Governing Council discussed a cut in the deposit rate. Overall, he struck a decidedly dovish tone and opened up a very real possibility of further QE or a cut in the deposit rate in December.

“Draghi noted several downside risks to the eurozone’s growth and inflation outlook in the press conference and stated that the ECB will act to support inflation if necessary. Commenting that they will reassess their monetary policy stance in December and that this week all instruments were discussed, with no clear preference, he even noted that a few members of the Council had hinted at using additional tools today.

“Within the eurozone we retain our preference for Portuguese and Slovenian government debt. We believe that the healing process remains underway in these economies and that there is further room for this to be reflected in bond spreads. In addition, we are positioned with a long Spain versus short Italy relative value trade and short the euro versus sterling.

“The Bank of Japan (BoJ) is also firmly on the loosening side, with their inflation target of 2% by mid-2016 looking increasingly unrealistic. The burning question now is how will they address this problem? Possible options include lowering the inflation target, extending the time horizon, increasing QE or a combination of these. All eyes will certainly be on the BoJ’s monetary policy announcement next week.”

More support for asset prices

Anthony Doyle, Investment Director at M&G Retail Fixed Interest team

“The market witnessed a very dovish ECB President Mario Draghi today. By committing to re-examining the ECB’s quantitative easing programme in December, Draghi has given a clear signal that QE will probably be extended and increased. Government bonds rallied on the news with the German 2 year bund hitting a record low of -0.32% and the euro falling a cent and half against the US dollar.

“It is clear that the ECB remains concerned about the pace of the economic recovery in Europe and the implications this will have in meeting its inflation target of below but close to 2 per cent. In addition, the slowdown in global growth weighed on the ECB Governing Council, particularly the uncertainties around emerging market growth.

“The ECB has bought €478bn of bonds since QE was implemented (€13bn ABS, €122bn covered, €343bn government and supranational bonds) which is around 3% of GDP. By way of comparison, the Bank of England’s £375bn QE programme represents close to 20% of GDP. By this measure, it  is clear that the ECB should and will act to increase its asset purchase programme at its next meeting as there is plenty of scope to do more. Any move to beef up QE would likely support asset prices, particularly in European bond markets and would probably result in a weaker euro.”

Leave a Reply

Your email address will not be published. Required fields are marked *