Comments from Stefan Isaacs, Deputy Head of M&G’s Retail Fixed Interest team, on today’s ECB meeting……
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Stefan Isaacs
The ECB today announced additional stimulus going beyond the markets expectations. In doing so it has managed to drive bond yields and the currency lower, risk assets and inflation expectations higher. The Bank has seemingly navigated a fine line in avoiding putting further pressure on an already weak banking system whilst providing additional accommodation to the broad economy. The ECB cut the deposit facility by 0.1% to -0.4% as well as reducing the main refinancing rate by 5bp to 0% and marginal lending facility by 5bp to 0.25%.
The more surprising element of the announcements is the expansion of the asset purchase programme by €20bn a month to €80bn and significantly to allow for the purchase of investment grade euro-denominated bonds issued by non-banks established in the Euro area. This is something of a surprise given political sensibilities, previous disagreement between doves and hawks on the Council and debate as to the legality of buying corporate bonds. Not surprisingly this has been well received by the bond markets with credit spreads gapping lower in response.
Finally the ECB is to start a series of four new generous long-term refinancing operations with a maturity of four years.
In delivering more than the market’s expectations the ECB should help confidence, encourage increased lending and raise inflation expectations. Whilst Mario Draghi won’t say it in public, the ECB will be well aware that it is approaching the effective limits of what it can do to support the economy. Areas such as structural reform and fiscal measures will also need to play their role.
Quelle: BONDWorld.ch
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