Prominent portfolio managers and senior investment figures have weighed in on the European Central Bank’s (ECB) decision to cut interest rates for the first time since 2016 and introduce an extensive stimulus package as the institution aims to boost the eurozone economy.

The bank’s president Mario Draghi will be stepping down from his role on November 1 and handing the reins over to Christine Lagarde. As a result of his penultimate policy meeting, the ECB announced that it had cut the deposit rate by 10 basis points to an all-time low of 0.5 percent. It will also restart quantitative easing at a rate of EUR 20 billion a month from November.

Andrea Iannelli, investment director at Fidelity International, believed that investors had already been pricing in further rate cuts. Ahead of Mr Draghi’s decisions, Fidelity International’s fixed income monthly view, which is written by its fixed income team, predicted most of these measures.

It said: “In Europe, all eyes are now focussed on the next ECB meeting in September, where the central bank is set to introduce a round of dovish measures with a cut in the deposit rate, tiering and quantitative easing (QE) all on the agenda. In terms of pricing, the market is pricing a 10bps cut in the deposit rate and for QE, monthly purchases in the region of EUR 20-30 billion per month. It will be interesting to see how current ECB President Draghi approaches his final Governing Council meeting before Lagarde takes over on 1st November.”

First responses: anticipated actions or surprise solutions?

Consequently, it isn’t surprising to see a predominantly measured response to the measures taken today, with the majority of commentators anticipating the gist of Mr Draghi’s policy moves.

David Zahn, head of European fixed income at Franklin Templeton noted that the decisions made by the ECB were in line with most forecasts and that its policy remained “accommodative”. In particular he praised the relaunch of QE in the eurozone.

He added: “In the past, the ECB has had a reputation for over-delivering and there was a risk that they would disappoint today. However, markets had already priced in the possibility of the ECB under-delivering and bonds have rallied significantly on the back of this accommodative stance.”

Andrew Mulliner, portfolio manager, global bonds at Janus Henderson Investors, expected the interest rate cuts but anticipated a less extensive use of QE. He considered this to be a “big surprise”. Otherwise, the decisions were as expected, with Mr Mulliner responding more negatively to the choices made by Mr Draghi than Mr Zahn’s more ambivalent stance.

He said: “As has become Mario Draghi’s specialty, he managed to deliver a dovish surprise to markets in spite of clear reservations from some colleagues and on paper, a relatively modest program compared to what some had hoped for or expected. However, as is often the case with regards to monetary policy, the devil is in the details.”

His reaction to the utilisation of QE was also notably gloomy, citing Japan in his reasoning.

He explained: “While most of the announcements followed the script set out by ECB observers in the run up to today’s meeting, the big surprise came with the announcement that the restarted QE program should continue until just before the ECB next hikes rates as opposed to a much shorter time period that most had expected of nine months to a year. Given the sclerotic condition of the Eurozone economy, this promise to maintain QE until rates go up, is as good as a QE forever. The parallels to Japan are clear.”

Nick Chatters, investment manager at Kames Capital was sceptical of the ECB’s capabilities to resolve long-standing issues within the eurozone economy.

He said: “It all comes down to the forward guidance. The ECB has committed to keep rates at current or lower levels and buy assets under the asset purchase programme, until the inflation outlook converges and stabilises close to but below its 2 percent target. They note ‘underlying inflation’ as the measure they would like to see converge, but where is this now? 0.9 percent. That’s a lot of assets they need to purchase to get it up to 2 percent.”

He also felt that the decisions, though not entirely out of the realm of expectations, left as many questions as answers.

Commenting on the policy choices further, Mr Chatters added: “Mr Draghi made comments about lifting the self-imposed ISIN limits, where the ECB can buy up to 33 percent of any bond issue, stating they had no appetite to discuss this. The market has taken this as less dovish than expected, but is this consistent with the mechanical statement on forward guidance? Will the ECB stop buying when they hit the ISIN limit and admit that they have failed to move the inflation outlook? It’s more likely in my view that he has left this on the table for the new president Christine Lagarde when she takes the reigns.”

Rosie McMellin, fixed income portfolio manager, Fidelity International was more optimistic about the measures imposed by the ECB.

She said: “While both the deposit cut and the amount of monthly purchases fall short of market expectations, this is more than outweighed by the changes to the forward guidance and open-endedness of the measures. Today’s package will likely reinvigorate the hunt for yield, and we would expect credit markets to rally.”

Will Draghi’s decisions rectify the issues facing the Eurozone?

Mr Zahn was quite upbeat about the likely outcomes of some choices made by the ECB, and felt that there were potentially tangible gains for investors.

He said: “The introduction of tiering effectively lowers the charges that banks pay on some of their excess cash, to help the banking system. It also signals to the market that rates will likely remain low for an extended period.”

Looking further into the future, believed Ms Lagarde would inherit a position where she had some say over the next course of action for the ECB, although continued stimulus was likely to be a key factor in the short to medium term.

He said: “With Mario Draghi’s tenure set to end following the October meeting there was some speculation around the influence of his comments and how much he could do in terms of locking incoming ECB President Christine Lagarde into a set policy, but he has set the stage for continued stimulus by the ECB. Markets will now be closely watching what Lagarde says which could have further influence markets. We believe these policies should continue to underpin the European government bond markets keeping yields low for the foreseeable future.”

Ms McMellin agreed with Mr Zahn, citing the open nature of the quantitative easing programme.

She explained: “At first blush the package might therefore look underwhelming, but with the ECB extending forward guidance, and making QE open-ended that would be the wrong conclusion to draw. The ECB now indicates that rates are expected to remain at current or lower levels until the inflation outlook ‘robustly’ converges to a level ‘close to, but below, 2 percent within its projection horizon’. QE is expected to run for as long as necessary and to end shortly before the ECB starts raising rates.”

Concerning its likely effectiveness, she said: “Today’s announcement of a new round of QE will see total ECB holdings increase further from the current EUR2.5 trillion level. The ECB has yet to confirm the details of the composition of the new asset purchase programme, and it is unclear for now whether the ECB has decided to change issuer limits. These details will be crucial in determining how much room the ECB has to increase net asset purchase further at a later stage, if economic conditions continue to disappoint.

Mr Chatter expected that the Eurozone was likely to face several headwinds.

He said: “From here, my view is that the market will test the ISIN limits, and the ECB will have to lift them at some point down the road as inflation expectations won’t have converged sustainably to target. For core rates (Germany) this is mildly bullish, but the real effect should be continuing peripheral convergence and rising inflation expectations (breaks). For now, we therefore remain happy to stay long peripheral spread and Eurozone inflation.”

Mr Mulliner however, had perhaps the most concerned outlook on the matter. He remained uncertain the ECB was prepared to act with enough conviction to resolve key issues in the Eurozone.

Outlining his position colourfully, he said: “The ECB has thrown the kitchen sink at the Eurozone economy once again, and we will have to see it if works. It was notable however that when asked about the unanimity of the governing council on these decisions, the only point of unanimous agreement was that fiscal policy needed to take the lead from monetary policy. Investors agree. The challenge is that whilst we are seeing Eurozone economies stepping in this direction including Germany, is there a sufficient will to act as decisively as the ECB has been prepared to do? With Christine Lagarde on her way in and Mario Draghi on his way out and a new commission president soon to be in place, the chess pieces are being positioned for such a shift to fiscal. The question we ask is, will they be willing to do whatever it takes?”