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Industry experts react to ECB approach to European economy

Nicholas Earl, 07/06/2019

Industry experts, fund managers, portfolio managers and financial advisers across the investment sector have commented on the approach of the European Central Bank (ECB) towards the European economy. 

The president, Mario Draghi, laid out the ECB's plans at its governing council meeting this week. It has announced that the bank has decided to keep interest rates on hold at record lows until the middle of 2020. It also declined the chance to re-start its quantitative easing programme of bond buying which it suspended at the back end of last year.

This arguably dovish approach to interest rates from ECB takes place in a backdrop of global trade wars, Brexit uncertainty and conflict between Italy and the European Commission.

Andrew Mulliner, global bonds portfolio manager at Janus Henderson Investors, was underwhelmed by Mr Draghi's approach. He criticised the lack of imagination in the president's response to issues within the European economy compared to previous years.

He said: “With rates already negative and QE finished, the ECB’s tool box appears to be close to empty. Mario Draghi, the mercurial central bank president who ‘saved’ Europe back in 2012 has a reputation for finding ways to provide additional accommodation to the European economy where others lesser central bankers would struggle.”

Mr Mulliner also suggested that the policies were modest and reflected the compromised nature of Mr Draghi’s position, unable to command support of the governing council.

He added: “Actual ECB policy actions were modest and the ECB forecasts are based more on hope than experience. His term finishes in November, he may now be a lame duck central bank president, unable to ram through policies that do not carry the full support of the governing council; a hallmark of his eight-year tenure.”

The portfolio manager concluded by suggesting that the questions over the credibility of the forward guidance the ECB had offered about the European economy in the upcoming years.

“The ECB delivered further accommodation today, adjusting its forward guidance a further six months into the future. It assured the markets that rates would not go up at least until the second half of 2020. The credibility of this forward guidance and its impact on the market can be questioned as markets assume a higher probability of the ECB cutting rates over this time period; so much for reigning in rampant market expectations for imminent hikes.”

Wolfgang Bauer, fixed income fund manager at M&G Investments, also believed that the rates decision was indicative of the ECB’s timid approach to issues in the European economy and that people shouldn’t be surprised by the decision to keep interest rates at zero percent.

He said: “ECB President Mario Draghi did not take out his proverbial big bazooka today, but a distinctly smaller calibre. Admittedly, the prospect of a rate hike has been pushed further out, thus keeping European interest rates at current ultra-low levels at least until mid-2020. But this comes hardly as a surprise to anyone. In fact, the recent precipitous drop in Bund yields suggests that markets have not been concerned with rate hikes but, quite the contrary, have been putting higher odds on a rate cut."

In addition, he also considered the latest targeted long-term refinancing operations (TLTROs) put forward by the ECB were less assertive than some investors might have expected. He did, however, accept that the ECB was displaying some awareness of problems European banks are facing.

He added: “Similarly, the details of the TLTRO-III programme, which were revealed today, fell slightly short of many market participants’ - arguably overly optimistic - expectations, who had speculated that the new TLTRO round might offer even more generous terms for European banks than the previous programme. However, even if the ECB did not go as far as some had perhaps anticipated, the launch of TLTRO-III demonstrates once again that the ECB is aware of the headwinds that European banks are facing and is willing to stay highly accommodative for the foreseeable future, which should give investors in the European banking sector some comfort.”

Nancy Curtin, chief investment officer at Close Brothers Asset Management, also summarised the ECB’s approach as passive and argued that this might have to change in the near future.

She said: “The employment story in the EU remains positive, but with inflation well below the ECB target, the trade war intensifying, and the Brexit puzzle still unsolved, talk of a rate rise has evaporated. Pressure is now increasing on Draghi to give the eurozone economy a boost. For the time being at least, the ECB has resisted taking radical action. But if the economy continues to stagnate, the ECB will be forced to intervene. With rates already at zero percent and no fiscal levers to pull, options are somewhat limited. Turning the QE taps back on by the end of the year is an increasingly probable scenario.”

Contrary opinions were also offered in response to the ECB’s announced measures and policies, which went against the perception of a cautious central bank reacting minimally to any potential volatility in the market.

Andrea Iannelli, investment director, Fidelity International suggested that the ECB had developed a thorough and wide-ranging strategy for dealing with potential issues in the European economy.

He said: “The ECB was slightly more ‘hawkish’ than markets were positioned for. This is not a huge surprise, and it would have been difficult for them to ‘outdove the market’, given very bearish consensus expectations on European growth and feverish concerns on ‘trade war’ impacts.”

He additionally suggested that the president was bold to say that there is "no probability of deflation" and "very low probability of recession" but that he remained pragmatic as “he kept all options open, particularly in the event of further deterioration of the outlook”.

“In particular, he reiterated several times that the Governing Council does not disregard the possibility of expanding the balance sheet yet again, should conditions warrant,” added Mr Ianelli.

David Zahn, Franklin Templeton fixed income group’s head of European fixed income, also felt that decisions made at the meeting had “intriguing implications” suggested that the bank was determined to achieve its inflation target.

He said: “We have felt for several weeks that the European Central Bank’s (ECB’s) June meeting would be more significant than many commentators were expecting. And so it has proved. It’s important to remember that the ECB remains an inflation-targeting central bank. So, as the market’s interest-rate expectations for the eurozone plummeted in recent months, we expected decisive action from ECB President Mario Draghi and his colleagues.”

An example of this action was the moves made by the ECB with its TLTRO programme.

He said: “The main focus of the ECB’s response announced today is its Targeted Long-Term Refinancing Operations (TLTROs) programme. Around €700 billion of the current TLTROs are due to mature in 2020-2021. We think the more attractive refinancing terms announced by the ECB today should encourage banks to refinance and probably borrow more and buy short-dated bonds. That in turn should keep yield curves in the eurozone’s so-called peripheral countries - those with smaller or less-developed economies in Europe - in good shape.”

Speaking about the wider economic picture, he added:  “Growth in Europe remains decent (but no more than that). Amid geopolitical uncertainty, such as Brexit and trade tensions, it seems obvious to us that almost all of the risks are to the downside. Therefore, we’d expect the bank to continue to be accommodative. We’re not expecting a eurozone interest-rate hike before 2022.”

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