European Central Bank to re-examine its €1.1 trillion quantitative easing strategy in December

22nd October 2015

The European Central Bank (ECB) said it was going to re-assess its €1.1 trillion quantitative easing (QE) at its December meeting on Thursday. Anthony Doyle, investment director on the M&G retail fixed interest team takes look at what to expect…

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 two 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 two 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, 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.

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