Investors the world over are awaiting the outcome of the latest European Central Bank (ECB) meeting today, hoping it will deliver the stimulus boost that failed to materialise in December.
Bank chief Mario Draghi has already hinted the ECB will loosen monetary policy in some way, but how remains a matter of speculation – and uncertainty over the outcome has resulted in the euro underperforming every other major currency over the past month. It has depreciated almost 3% against the dollar since February 10.
It is widely assumed bank deposit rates will be cut, from -0.3% to about -0.4%.
Eurozone inflation slipping beneath zero has also fuelled speculation that the bank’s quantitative easing (QE) programme will be redoubled in some way, although an M&G survey of brokers at major financial institutions suggests there is little agreement among industry giants over whether it will be expanded in size and/or its timeline extended, and by how much in either case.
However, Antoine Lesné, a regional head of ETF sales strategy at State Street Global Advisors, believes investors are generally expecting an increase in the programme’s size, from €60 billion to €80 billion euros per month.
“There is the potential for market disappointment if Draghi doesn’t do ‘whatever it takes’ to feed expectations,” he said.
“Should this happen, it wouldn’t inevitably lead to a sell-off, but markets have been rebounding on the basis there will be more QE.”
Alternative measures could include the introduction of tiered negative rates, and a strengthening of the bank’s existing asset purchases programme, believes Eugene Philalithis, portfolio manager of the Fidelity Multi Asset Income Fund.
“With European banks having suffered at the start of 2016, we should also see a robust defence of Europe’s banks – expect Draghi to point out how most systematically important banks are now meeting or exceeding the demanding capital requirements set by regulators,” he said.
However, others are doubtful the ECB can and will do anything to fight inflation and restore the Eurozone to growth. French bank Societe Generale noted that other proposed measures, such as a corporate bond purchase programme or expanded collateral eligibility, would have limited economic effect.
“We think the ECB is approaching the effective limit of what it can do,” a spokesperson said.
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