Analysts respond to the ECB’s fine balancing act

The European Central Bank said on Thursday it plans to end its €2.4tn bond-buying programme by the end of the year, and said very low interest rates would remain unchanged at least “through the summer of 2019”. Here’s what investors and analysts make of it all . . .

The market reaction was to sell euros, a sign that investors are taking the ECB’s strong notes of caution on global trade and market volatility seriously.

David Riley, chief investment strategist at BlueBay notes this balanced message:

The contrast between Fed Chair Powell’s repeated expressions of confidence in the US economy that is doing “very well” and ECB President Draghi’s reference to ‘solid’ economic growth but “rising uncertainty” is stark. The euro is understandably weakening against the US dollar with the Fed ever more confident in the economic outlook and need to raise interest rates and the ECB that remains cautious about removing its extraordinary monetary support. European government bonds will stay very low anchored by negative ECB deposit rate while growth-sensitive assets will be supported by continued ultra-easy monetary policy.

Marc Ostwald, global strategist at ADM Investor Services, described it as “another Draghi tour de force”:

We should by now have enough respect for Draghi to realise that he would come up with some formulation of the policy that would err on the dovish side, just as the Fed yesterday managed to be resolutely hawkish, without being aggressive.

Karen Ward, chief market strategist at JPMorgan Asset Management said asset purchases were “beginning to do more harm than good.” She said the ECB “had to purchase assets indiscriminately — it was not able to pick winners and losers. This prevents the healthy functioning of the bond markets which reward debt issuers — both governments and corporates — for good behaviour.”

“Stepping back from QE will insulate the ECB from potential criticism that it is funding the fiscal largesse associated with certain populist policies (given the recent election in Italy this was an increasing risk),” she said.

Ricardo Garcia, chief economist for the eurozone at UBS Global Wealth Management suggested the slide in the euro will pass. “We continue to believe that an exit from QE will ultimately underpin the euro and lead to upward pressure on Eurozone bond yields,” he said.

Ken Wattret from IHS Markit also pointed out that the ECB’s reference to “uncertainties” surrounding the inflation outlook “suggests a lack of conviction and a need for some flexibility.”

On the issue of geopolitics, he said the timing of the announcement “demonstrates that the Italian situation is not a game-changer (yet). That said, it will probably have been a contributory factor to the preference for some flexibility to change course both short-term and further out.”

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Analysts respond to the ECB’s fine balancing act

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