The European Central Bank is cutting its asset purchase programme by September before ceasing it altogether by December – drawing a string of comments from fixed income and equity investors alike.
The decision by the ECB to trim the programme comes after further data suggesting the eurozone economy has responded well to the unorthodox monetary policy ‘medicine’.
At its meeting in in Riga on 14 June, the central bank stated that “the governing council will continue to make net purchases under the asset purchase programme (APP) at the current monthly pace of €30bn until the end of September 2018.”
“The governing council anticipates that, after September 2018, subject to incoming data confirming the governing council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15bn until the end of December 2018 and that net purchases will then end.”
Karen Ward, chief market strategist for the UK and Europe, JP Morgan Asset Management, cited the move as expected.
“Although the eurozone economy still requires supportive monetary policy, asset purchases were beginning to do more harm than good, in our view,” she said.
Wolfgang Bauer, fixed income manager at M&G Investments, described the move at “fairly dovish” given the tapering rather than abrupt end to the programme. Additionally, “the ECB has de factor ruled out any rate hikes for the first half of next year…the chances for an early 2019 rate hike had become pretty slim anyway, but the ECB statement today has removed any remaining ambiguity.”
Stefan Kreuzkamp, CIO at DWS, too characterised the decision as “roughly in line with our expectations” and that it has indicated that it does not want any quick rate hikes. The bank’s suggestions to wait for further data before making decisions is also seen as a positive move, in light of uncertainties such as those around global trade.
Dovish
The tapering and overall policy approach announced by the ECB has been described as ‘dovish’ by a number of commentators.
Hetal Mehta, senior European economist at LGIM said: “The ECB has deliberately given itself a great deal of ‘optionality’ but it looks like rates are still likely to be negative at the end of Draghi’s tenure.”
Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers added: “Despite preannouncing the end of quantitative easing by December 2018, [ECB president] Draghi managed to deliver a firmly dovish message on [its] monetary policy outlook. Forward guidance on rates was strengthened – caveated with a promise of no rate hike until at least summer 2019 – and reinvestments were promised for an ‘extended period’. In addition, Draghi’s comment, that the governing council can adjust all its policy tools if needed, gave an air of another ‘whatever it takes’.”
Ahmed also cited trade concerns, along with questions around Italy, as reasons why rates will not go up before the back end of 2019.
Timothy Graf, head of macro strategy for EMEA at State Street Global Markets, and Brendan Lardner, active fixed income portfolio manager at State Street Global Advisors, see another reason for the dovish approach and expectations that rates will rise slowly: core eurozone inflation remains “a long way from the ECB’s target of ‘below, but close to, two percent'”.
And the ongoing risks may be enough to derail the current planned phasing out of quantitative easing and a return to historically normal interest rates, adds Silvia Dall’Angelo, senior economist at Hermes Investment Management.
“Trade tensions and increased volatility in financial markets are now mudding the outlook. In addition, the eurozone would not be immune to a slowdown in the US, where the business cycle is at a later stage and the vulnerability to policy errors is higher. For this reason, the ECB’s plan for the final stages of monetary policy normalisation might end up being shelved, before they are given serious consideration.”
Ultimately, this latest picture painted of the eurozone economy is set to put more water between it and the US, stresses David Riley, chief investment strategist at BlueBay.
“In my view, it is now more likely that the ECB will not begin to raise policy rates until September 2019. The ECB’s deposit rate and hence bank deposit rates are likely to stay in negative territory for at least another few years in my opinion.”
“The contrast between Fed chair Powell’s repeated expressions of confidence in the US economy that is doing ‘very well’ and ECB president Draghi’s reference to ‘solid’ economic growth but ‘rising uncertainty’ is stark. The euro is understandably weakening against the US dollar with the Fed ever more confident in the economic outlook and need to raise interest rates and the ECB that remains cautious about removing its extraordinary monetary support. European government bonds will stay very low anchored by negative ECB deposit rate while growth-sensitive assets will be supported by continued ultra-easy monetary policy.”
