PA ANALYSIS: Is the ECB scared to turn off the QE tap?

Added 20th October 2016

European Central Bank president Mario Draghi delivered a relatively short address on Thursday which was light on substance, but there was something in his remarks that may worry investors.

PA ANALYSIS: Is the ECB scared to turn off the QE tap?

As well as confirming no change to rates Draghi indicated, perhaps off script, that ECB QE will continue for some time yet. In fact, he said he will not even discuss curtailing the €80bn a month programme until December.

As with many things there is a glass half full or half empty interpretation of Draghi’s rhetoric. The half full option is to say QE is here to stay for a sometime so there is no need to worry about the monetary rug being pulled from beneath the feet of the fragile European economy as it wrestles with Brexit, worries German banks, as well as other geopolitical threats.  

The glass half empty way to interpret the comments is that Draghi feels the need to tread extremely carefully and avoid anything that could spook markets because he has little confidence in the European economy at the moment, and is afraid any talk of turning off the QE tap will destroy any confidence there is in markets.

Sending the indirect message that Europe’s economy has grown dependent on QE is a dangerous thing to do, because it has to end at some point if the ECB and the euro itself are to maintain credibility.

It is not an easy predicament of course, and it is unlikely many people would fare better than Draghi in dealing with the situation.

"It is not an easy predicament of course, and it is unlikely many people would fare better than Draghi in dealing with the situation"

Paul Brain, head of fixed income at Newton Investment Management noted how little room to move Draghi and the ECB have at the moment.

“Given the speculation about tapering and the prior speculation about an extension in the program, the fact that neither was discussed is bound to disappoint someone,” Brain said. “The euro tried to rally as the lack of extension suggested a modest tightening but once the questions about tapering were dismissed the currency gave up.”

“The status quo remains,” said Close Brothers Asset Management CIO Nancy Curtin. “What next?” is the question on investors’ lips, as they look for signs of how Draghi will move to protect the EU’s fragile recovery when its current quantitative easing programme finishes in March.”

“Economic data continues to be mixed, exacerbated by potential political instability, with important elections in Italy and Germany over the next twelve months, not to mention the start of Brexit negotiations with the UK,” Curtain added.” Businesses and investors will be looking for a shift to fiscal stimulus, rather than monetary stimulus, as the means to a more robust leg to long-term recovery.”

David Zahn, head of European fixed income at Franklin Templeton noted that today’s lack of substance cranks up the pressure on the ECB to provide clarity on its plans in December.

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Alex Sebastian

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Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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