The industry has been left disappointed by the European Central Bank’s (ECB’s) decision to cut interest rates by 10 basis points and extend its quantitative easing (QE) programme by six months.
ECB president Mario Draghi (pictured) today announced the bank would decrease the rate on the deposit facility to -0.30% with effect from 9 December and extend QE to March 2017.
As part of this extension of the asset purchase programme, he said the ECB would keep bond buying at €60m a month and include regional and local debt.
He said: “Today’s decisions were taken in order to secure a return of inflation rates towards levels that are below, but close to, 2% and thereby to anchor medium-term inflation expectations.”
However, Hermes Investment Management group chief economist Neil Williams said the ECB president had under-delivered.
He said: “First, he hasn’t quite pushed out the ‘boat on QE2’! By extending it six months to March 2017, and including regional and local debt, his sign of intent is he will do more. But, by not upping the pace, at just €60bn purchases per month, and excluding other assets such as more corporate bonds and mortgage debt, he is keeping some powder dry.
“Second, to get ‘bang for his buck’, he rightly shaved the deposit rate further into negative territory. But, the only -10bp cut, to -0.3%, is puny. Aimed at discouraging cash hoarding, even more negative rates will likely be needed if the liquidity QE throws up is to be pushed out to where it matters most – consumers and businesses.”
He added: “While helpful in addressing the symptom, deflation, Mr Draghi cannot be expected to solve the problem – a monetary union devoid of economic union. This will take years.”
JP Morgan Asset Management global market strategist Mike Bell said Draghi had not done enough to positively surprise markets and immediately weaken the euro even further.
He added: “Despite the initial mild disappointment today we would expect eurozone equities to remain well supported by the ongoing and extended QE and improving earnings. Given that the Fed are likely to raise interest rates at their meeting later this month, the stark divergence in monetary policy paths between the US and Europe could also lead to more euro weakness going forward despite the initial rally.”
Elsewhere, JLT Employee Benefits director Charles Cowling said the announcement was bad news for pension schemes as it signalled the ECB had no intention of increasing interest rates anytime soon.
He said: “The ECB’s extension of its QE programme is not a surprise, given the continued weakness in the eurozone economy and the lack of inflationary pressure. However, this is bad news for pension schemes as it suggests the ECB feels interest rates may stay very low for longer than expected. Our research, launched in October, suggested that a delay of 12 months in interest rates rising could see total UK pension scheme deficits balloon by £62bn.
“Most pension schemes are currently following investment strategies which are not fully hedging interest rate exposures – most LDI programmes are only partially hedging interest rate exposures. As a result, if interest rates rise more slowly than anticipated by markets, then this will increase pension scheme liabilities and, potentially, pension scheme deficits.”
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