European stock markets picked up after the central bank unveiled more quantitative easing (QE) measures. However, Mario Draghi’s words later led to a correction.
In terms of interest rates, it is within expectation that the European Central Bank lowered the deposit rate by 10 basis points to negative 0.4 percent. But its decision to lower other policy rates, such as the refinancing rate, were not expected.
Meanwhile, the ECB unveiled plans to buy more bonds and expand the eligible bond targets to include investment-grade corporate bonds issued by non-banking institutions.
It also started another round of of Targeted Longer-Term Refinancing Operations (TLTRO), which effectively pay the interest due the banks for their lending.
Meanwhile, the central bank’s estimates for inflation and economic expansion are lower than expected, presenting an urgent situation.
The estimation for this year’s core inflation rate has been reduced to 0.1 percent from the forecast of 1 percent made last December, while economic growth estimate is down from 1.7 percent to 1.4 percent.
The expanded asset purchase scheme is expected to persuade the market that negative interest rate is not the only accessible tool. The TLTRO can both reduce the negative impact of negative interest rates while making sure the support is given to lenders for their families and the real economy.
We expect the new measures to expand the ECB’s balance sheet to 1.25 trillion euros (US$1.4 trillion) which would be very helpful for banks in the periphery regions to offset the impact of negative interest rate in the eurozone on their earnings.
Overall, ECB’s latest measures are likely to provide moderate support for assets in the eurozone.
Official data shows stronger consumption and increasing corporate and household borrowings are gradually promoting the recovery.
Investors welcome the new measures. They also offer opportunities for certain companies, especially those in the consumer sector. But, to notably lower the unemployment rate, the economic expansion must be accelerated.
With the latest round of QE measures, The ECB is telling the world that it has lots of options.
While not all accessible tools are reasonable to use now, investors should be aware that the continuous discussion and concerns over this issue will suppress market sentiment.
This article appeared in the Hong Kong Economic Journal on March 21.
Translation by Myssie You
[Chinese version 中文版]
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