The European Central Bank has announced its June policies, which include leaving interest rates unchanged and hinting at further action if inflation fails to improve. President Mario Draghi said at a press conference that external shocks, such as a possible exit from the EU for Britain, would affect the market negatively and he recommends that the UK remain in the EU.
Mr. Draghi hinted that there is still the possibility for future stimulus if needed. This is following the ECB’s increase in its qualitative easing programme in March from €60 billion to €80 billion. The ECB will also start buying high-grade corporate bonds in early June.
The euro barely reacted to the news that interest rates will not be changed. Most recent forecasts now expect inflation to hit 0.1% this year, 1.3% in 2017 and 1.6% in 2018, possibly due to a rise in oil prices.
David Cheetham of XTB.com comments: “As was widely expected the ECB have announced that they will make no alterations to the three benchmarks interest rates or QE programme following the conclusion of their latest meeting. During the press conference shortly after the rate decision President Draghi struck dovish chords as the markets have grown accustomed to in recent times, stating the rates will stay at present or lower levels for some time. Market reaction so far has been fairly subdued with the slight upward revision to this year's inflation forecast of 10 basis points arguably the biggest takeaway, but seemingly not a big enough development to cause a sustained market move.”
David Cheetham is a market analyst at XTB. For more information about him, please visit: https://www.xtb.com/en/market-analysis/our-analysts/david-cheetham
European Central Bank (ECB) headquarters
European Central Bank (ECB) and Bank of England (BoE) have announced measures to enhance financial stability in relation to centrally cleared markets in the EU.
The ECB and the BoE have agreed enhanced arrangements for information exchange and cooperation regarding UK Central Counterparties (CCPs) with significant euro-denominated business.
A CCP places itself between the original counterparties to a transaction, effectively guaranteeing that if one counterparty fails, the CCP will continue to perform on the transaction to the other party. A CCP protects itself by taking collateral (‘margin’) from each party and by collecting a ‘default fund’ from its members to meet losses that exceed the margin it holds.
The ECB and the BoE are also extending the scope of their standing swap line in order, should it be necessary and without pre-committing to the provision of liquidity, to facilitate the provision of multi-currency liquidity support by both central banks to CCPs established in the UK and euro area respectively. CCP liquidity risk management remains first and foremost the responsibility of the CCPs themselves.
This announcement follows the judgement on 4 March 2015 by the General Court of the EU. In light of these agreements the ECB and UK government have agreed to a cessation of all legal actions covering the three legal cases raised by the UK government.
Ashish Misra, Lloyds Bank Private Banking
March saw an overall average asset class sentiment reach a high, according to the monthly Lloyds Bank Private Banking Investor Sentiment Index. With continued improvement in overall asset class sentiment, net sentiment increased for seven of the ten asset classes surveyed with only a modest decline for the other three, leading to its highest overall score since June 2014.
However, in contrast to asset class sentiment, actual asset class performance decreased for nine out of the ten asset classes since last April.
Despite receiving the most negative sentiment of all asset classes (-33%), Eurozone shares recorded the largest positive month-on-month gain for the first time. With net sentiment increasing 13 percentage points, Eurozone shares also saw the highest increase for the asset class since the survey began in March 2013.
Ashish Misra at Lloyds Bank Private Banking, said: “The continued improvement in asset class performance paints a positive outlook for investors. Most notable is Eurozone shares, which has gained significant momentum, despite still displaying a highly negative sentiment. This could reflect the improvement in sentiment on account of the commencement of quantitative easing by the European Central Bank and some improvement in the overall macro-economic backdrop for the region despite ongoing challenges in the periphery.”
Gold was the biggest net loser in March, dropping 5 percentage points compared with February and saw its first negative swing since the start of the year.
Three out of the four sterling-denominated asset classes recorded a positive performance with UK shares rising 7 percentage points, UK corporate bonds rising 4 percentage points and UK government bonds rising 1 percentage points. UK property saw a 3 percentage points fall in sentiment, signalling its second dip this year.
In terms of an annual change, six of the asset classes recorded an increase, with Japanese shares (+28%), UK property (+17%) and UK government bonds (+10%) seeing the largest increases. Commodities (-38%), Gold (-16%) and Eurozone shares (-9%) were the worst performers.
All of the four sterling-denominated classes saw an increase in terms of annual change with UK corporate bonds and UK shares seeing an increase of 7% and 2% respectively.
This afternoon, Mario Draghi, President of the European Central Bank (ECB) announced the much awaited outcome of the Governing Council’s meeting on quantitative easing (QE) for the Eurozone economy.
First, the ECB is to launch an expanded asset purchase programme, encompassing the existing purchase programmes for asset-backed securities and covered bonds. The expanded programme will see monthly purchases of €60 billion set to run for 18 months or until required.
Starting March, the Eurosystem will start to purchase euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market. The purchases of securities issued by euro area governments and agencies will be based on the Eurosystem NCBs’ shares in the ECB’s capital key.
Second, the Governing Council decided to change the pricing of the six remaining targeted longer-term refinancing operations (TLTROs). More details will be released on this later.
Third, a decision was taken to keep the key ECB interest rates unchanged. The main interest rate remains at 0.05%, the marginal lending rate stays at 0.3% and the deposit rate at -0.2%.
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“Today’s monetary policy decision on additional asset purchases was taken to counter two unfavourable developments. First, inflation dynamics have continued to be weaker than expected. While the sharp fall in oil prices over recent months remains the dominant factor driving current headline inflation, the potential for second-round effects on wage and price-setting has increased and could adversely affect medium-term price developments. This assessment is underpinned by a further fall in market-based measures of inflation expectations over all horizons and the fact that most indicators of actual or expected inflation stand at, or close to, their historical lows. At the same time, economic slack in the euro area remains sizeable and money and credit developments continue to be subdued,” stated Mario Draghi, President of the ECB.
“Second, while the monetary policy measures adopted between June and September last year resulted in a material improvement in terms of financial market prices, this was not the case for the quantitative results. As a consequence, the prevailing degree of monetary accommodation was insufficient to adequately address heightened risks of too prolonged a period of low inflation. Thus, today the adoption of further balance sheet measures has become warranted to achieve our price stability objective, given that the key ECB interest rates have reached their lower bound.”
According to Mr Draghi, today’s measures will decisively underpin the firm anchoring of medium to long-term inflation expectations.
“The sizeable increase in our balance sheet will further ease the monetary policy stance. In particular, financing conditions for firms and households in the euro area will continue to improve. Moreover, today’s decisions will support our forward guidance on the key ECB interest rates and reinforce the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies. Taken together, these factors should strengthen demand, increase capacity utilisation and support money and credit growth, and thereby contribute to a return of inflation rates towards 2%.”
The finance industry has been quick to pass comment on the QE measures.
“The size of the ECB’s programme, combined with its potentially open-ended nature, should convince markets that Mario Draghi is committed to fighting deflation,” said Ben Brettell, Senior Economist, Hargreaves Lansdown.
“In many ways the fact that Draghi has finally been forced to use his silver bullet is a measure of how bad the economic situation in Europe has become. Bundesbank officials have made it clear they don’t think economic conditions warrant QE, but few outside Germany would agree that today’s measures are anything less than necessary.”
John Cridland, CBI Director-General, said: “At the moment, flagging Eurozone economies are dragging on UK and world growth. QE will give the Eurozone recovery a much-needed boost, which should also have a positive economic effect in the UK.
“To gain maximum effect though, this action must go hand-in-hand with structural reform. France needs to work with the business community to modernise its labour rules and Germany should invest more in infrastructure.”
While QE has been largely welcomed, Europe faces another challenge later this week when Greece goes to the polls. A victory for the anti-austerity Syriza party could escalate ‘Grexit’ fears amid negotiations over new bailout terms when the current deal expires in February.
