ECB goes into holding pattern

Added 8th September 2016

The European Central Bank decided to stick rather than twist today as it announced the deposit rate has been held at -0.4%, the refinancing rate held at zero, and the details of its €80bn per month quantitative easing programme are unchanged.

ECB goes into holding pattern

Expectation had been building that the QE programme would be expanded or at least extended beyond March 2017, but President Mario Draghi and his colleagues decided to keep what is left of their powder dry.

The euro climbed against the dollar on the announcement by just under 1% to $1.13 before falling back to $1.12.

“Despite the market noise caused by the Brexit vote, the ECB believes the impact on Eurozone GDP is likely to be only moderately negative, with the GDP forecast lowered by 0.1% in 2017 and 2018,” said Shilen Shah, bond strategist at Investec Wealth & Investment. “Base effects from higher energy prices mean that inflation is likely to drift up in 2017 and 2018 to 1.2% and 1.6% respectively, however underlying inflationary pressures remain somewhat weak. Any extension of the ECB bond programme was only hinted at, with Draghi suggesting no extra stimulus for the time being. The scarcity of bonds that meet the bond buying programme’s criteria may however force the central bank’s hand before the programme’s scheduled end date of March 2017.”

According to Anthony Doyle, investment director, M&G retail fixed interest, the announcement came as a ‘slight surprise’ to the market.

“From a macro perspective, European economic data has remained resilient following the UK’s decision to leave the EU,” he said. “Both growth and inflation have been in-line with ECB forecasts. Consequently, the ECB Governing Council probably feels that there is plenty of time to assess incoming economic data and the impact of its quantitative easing programme.”

Doyle thinks things may be different at the next meeting however, with further stimulus being launched just a matter of time. “Despite taking some comfort from the current resilience of the European economy, we believe the ECB will look to expand its asset purchase programme before the end of 2016. With an annual inflation reading of only 0.2% in August, the European economy remains dangerously close to entering into a deflationary environment,” he noted.

The market reaction the announcement has been relatively limited as result of the lack of anything new of consequence, according to Alex Lydall, a trader at Foenix Partners.

“At first glance rhetoric from Mario Draghi appeared largely unchanged but a potential undertone was present as he specified he had tasked the ECB committee to evaluate stimulus options moving forward,” Lydall said. “Reading between the lines, this could potentially suggest a road is being paved to further action towards the end of this year, most likely regarding quantitative easing. Thus far, monetary policy measures have seen limited upside for the bloc state and it seems Draghi is well aware that action will be needed, it is just what and when. Deflation is still particularly worrying and he noted that the probability of this occurring again has unfortunately not decreased.”

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Alex Sebastian

News editor

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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