Industry reacts to ECB’s ‘unnecessary gamble’ over QE
The European Central Bank has taken an unnecessary gamble with extended forward guidance and plans to end quantitative easing according to a number of industry commentators.
Reacting to yesterday’s announcement David Slater, manager of Trium Capital’s Trium Macro Rates fund said:
“The ECB has announced QE will end in December and rates are to be on hold until ‘at least’ summer 2019. If the ECB hikes rates in Q3 next year – the earliest date compatible with its forward guidance – should Europe achieve the growth it forecasts in the intervening period, it will be doing so after 25 consecutive quarters of positive growth.
“By that time, market prices imply that the US hiking cycle will have finished. One wonders why the ECB felt the need to pre-commit to such a long period of forward guidance, more than a year from today.
“I can only think the ECB was so scared of causing a bond market sell-off on the announcement of the end of QE that it decided to cushion the blow with extended forward guidance. But committing to no hikes for more than a year, when rates are at -0.4, it owns a sizeable proportion of the European government bond market and we’re arguably very late in the cycle, looks like an unnecessary gamble.
“The stakes are very high; if Europe finds itself going into a global recession in late 2019 with no ammunition left to fight a downturn, it risks finding itself in a critical situation. To do so for the sake of avoiding some short-term market volatility looks ill judged.”
Garland Hansmann, portfolio manager, Investec Multi-Asset Credit, said that although the ECB left key interest rates unchanged, this came as a surprise to markets with a more accommodating than expected stance.
“With the statement that key interest rates will remain at historically low levels until the summer of 2019, the ECB has removed any fantasy of an earlier rate hike.
“The statement is likely to have little effect on longer-term interest rates, but may hold them at current low levels with more stability than would otherwise have been the case. However, one could imagine that it may have a weakening effect on the euro, especially in comparison with the USD, where the Fed raised interest rates yesterday.
“Draghi is therefore aiming to make sure that inflation continues to rise to the ECB’s target level and provides support to the European economy which has recently shown weaker numbers.
“The end of December’s asset purchase program was largely expected. It will be reduced from September to an estimated EUR 15bn per month and then discontinued. However, income and repayments of the existing investments will be reinvested until further notice and we estimate this amount to be around EUR 26bn per month.” (continues…)