Thursday’s QE: Analysis

The odds are stacked that the European Central Bank (ECB) will pull the trigger on quantitative easing (QE) on Thursday.

For example, IHS Global Insight says the pressure has been building on the ECB to go down the QE road for a long time now, but it has met with strong opposition, especially from Germany.

The case for QE has become stronger as inflation continues to fall, growth has remained stunted and credit conditions still tight, especially for smaller companies in the periphery countries of the Eurozone.

The final driver towards QE appears to be the fact that 12 of the 19 Eurozone countries suffered deflation in December according to Howard Archer, chief UK and European economist of IHS Global Insight.

“However, it is argued that if the ECB does not go for full-blown unrestricted QE, it will dilute the potential effectiveness of its actions and also could cause some questioning of its commitment to the policy,” says Archer.

One of the big question marks over the ECB’s QE programme is whether it should be limited or unlimited; a figure of a €500 billion has been widely reported. There is also an indication that each of the 19 Eurozone members’ central banks will largely be responsible for buying of their own sovereign bonds – a move largely viewed as appeasing Germany.

Stephen Macklow-Smith, head of strategy team for European equities at JP Morgan Asset Management, says: “Under the pressure of low levels of inflation, we expect this week the ECB will start widespread purchases of assets including government bonds – the market is sure to view that favourably.”

Macklow-Smith is cautious over potential threats within the Eurozone – he mentions the elections in Greece, the UK and Spain with voters disillusioned with austerity – although he remains positive.

“We are optimistic for another positive year in Europe. Official policy is supportive, valuations are attractive, there is scope for earnings to grow, and corporate balance sheets are healthy. We also think that the European economy can continue to recover, a stance which is supported by the fact that economic releases have on balance been better than expectations for the last four months,” he says.

©2015 funds europe



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