At the governing council’s meeting in Frankfurt on Thursday, the ECB slashed its deposit rate by 10bp to minus 0.5% and announced the restart its quantitative easing (QE) programme, buying €20bn of bonds per month from November.
The ECB paused its QE programme in December last year, after buying €2.6tn of bonds over the previous three-and-half years.
Outgoing ECB president Mario Draghi – who will finish his eight-year term at the end of October and hand over to Christine Lagarde – said the ECB’s bond buying programme had “relevant headroom to go on for quite a long time at this rhythm without having the discussion about limits”.
Draghi added that the eurozone economic faced “more protracted weakness” because of the persistence of downside risks in global trade. Eurozone industrial production contracted 0.4% in July, as Germany, Europe’s largest economy, teeters on the brink of recession
“We expect the restarted asset purchase programme will be predominantly centred on government bonds, but probably with more focus on corporate bonds than previously."
The ECB slashed its eurozone growth forecasts by 10bp to 1.1% this year, and by 20bps to 1.2% for 2020.
Open-ended timeframe ‘dovish surprise’
“After several months of anticipation, today the ECB unveiled a robust package of monetary measures designed to boost the flagging eurozone economy,” said Thomas Sartain, senior portfolio manager at Invesco.
“Whilst the scale of purchases and rate cut delivered were at the lower end of market expectation, the commitment to asset purchases for an open-ended timeframe is a clear dovish surprise from the ECB,”
“After a summer of elevated uncertainty and high levels of volatility in financial markets, these actions should be positive for broader risk sentiment, and should support government and corporate bond spreads in European fixed income.”
Silvia Dall’Angelo, senior economist, Hermes Investment Management said: “While the monthly size of net purchases is modest compared to previous QE rounds, the open-ended nature of the new programme makes it quite powerful. In addition, the establishment of a two-tier system for reserve remuneration means that rates can be cut further, so the package can be easily extended if necessary, and all mutually reinforcing elements of it can be strengthened.”
Nonetheless, analysts warned the impact on the real economy from the set of announced measures is uncertain.
Sartain added: “The fundamental drivers of the loss of momentum in the eurozone economy over the previous 12 months – led by weak trade and elevated global uncertainty – are not going to be eased by these measures. Whilst the downside risks may be cushioned by this additional stimulus, until these clouds lift, the eurozone economy is likely to remain on a low growth trajectory,”
More focus on corporate bonds
David Zahn, head of European fixed income at Franklin Templeton said: “We expect the restarted asset purchase programme will be predominantly centred on government bonds, but probably with more focus on corporate bonds than previously. The introduction of tiering effectively lowers the charges that banks pay on some of their excess cash, to help the banking system. It also signals to the market that rates will likely remain low for an extended period.
“With Mario Draghi’s tenure set to end following the October meeting there was some speculation around the influence of his comments and how much he could do in terms of locking incoming ECB president Christine Lagarde into a set policy, but he has set the stage for continued stimulus by the ECB. Markets will now be closely watching what Lagarde says which could have further influence markets. We believe these policies should continue to underpin the European government bond markets keeping yields low for the foreseeable future.”