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ECB goes into holding pattern

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.


PA Europe

Expectation has been building that the QE programme will 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 for now.

However, Draghi hinted during his subsequent press conference that his base case is still an extension of the QE programme, saying there is a “substantial amount of monetary support that is embedded in our staff projections [for GDP growth and inflation]”, as was duly noted by Blackrock’s head of global fundamental fixed income, Marilyn Watson. This view is shared by most investors, it seems. 

“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,” said Anthony Doyle, investment director, M&G retail fixed interest.  

QE changes

Several fund buyers have also been telling Expert Investor over the past couple of weeks that they expect further easing by the ECB. This may explain so many of them are currently holding their European equity allocations, as they are waiting for details about the extension of the QE programme. The ECB will have to make some changes to the distribution key of the programme or has to buy more corporate bonds, as it is not allowed to purchase bonds with a maturity below the ECB’s deposit rate.

But Draghi could afford to play a bit of a waiting game, according to Shilen Shah, bond strategist at Investec Wealth & Investment. “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,” he said.