The ECB exceeded market expectations once again this month, highlighting both the commitment to anchoring inflation expectations, and also heightened concerns that market participants are losing faith after so many months of low inflation prints. The recent drop in inflation expectations inspired both a cut in interest rates and a firm commitment to ABS purchases, which alongside the upcoming TLTROs could boost the central bank balance sheet by up to €1trn Euros. There are certainly question marks surrounding the technical difficulties of large-scale asset purchases, which explains the hesitancy in committing to a specific size, but the policy commitment should be big enough to boost confidence in the ECB’s ability to meet its mandate. This will mark the beginning of Quantitative Easing, albeit without going down the more traditional route of sovereign bond purchases. Institutional hurdles remain to such a policy but it remains in the armoury if the economic situation were to worsen further. For now, this policy should provide further solace to risk assetsand a continuation of the recent ‘hunt-for-yield’ theme in fixed income markets, at least until we find out how quickly the balance sheet expansion occurs.
Martin Harvey is a fixed income fund manager at Threadneedle Investments