The main features of this comprehensive package are the following:
- The interest rate on the main refinancing operations of the Eurosystem will be reduced by 5 basis points to 0.00%;
- The interest rate on the marginal lending facility will be reduced by 5 basis points to 0.25%;
- The interest rate on the deposit facility will be reduced by 10 basis points to -0.40%;
- The monthly purchases under the asset purchase programme will be expanded to EUR 80 billion, starting in April. The ECB’s issuer limit has been increased from 33% to 50% – this will carry on the yield curve flattening process;
- Investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases;
- A new series of four TLTRO, with a maturity of four years, will be launched in June.
The last two items are clearly where the ECB has exceeded expectations. The TLTRO should alleviate concerns regarding the banking sector and its structurally reduced profitability due to the current interest rate environment. The new TLTROs are subject to the amount of loans in a bank’s books: the more it lends, the cheaper the money it gets. These measures will come up to full speed after June.
After the initial thumbs-up from the market, the main question will be the impact on the real economy. Will these measures boost credit growth and therefore improve the whole economy? That remains to be seen. The ECB has to implement such drastic measures because deflation fears are mounting and eurozone growth is lacklustre. The ECB’s macro scenario has been revised down significantly: GDP for 2016 from 1.7% to 1.4% (below consensus at 1.6%), 1.7% for 2017, and 1.8% for 2018; inflation forecasts: from 1% to 0.1% (!!) in 2016, from 1.6% to 1.3% in 2017 and 1.6% in 2018. This means it will take a long time for inflation to creep back up to its 2% target.
This doesn’t change our current view that visibility has worsened. We will watch credit spreads closely in the banking sector, as well as earnings revisions and any further improvements in the commodity sector.
Since February we have been reducing risks as we started the year too confident on risky assets. The ECB’s latest move doesn’t alter our view much, because it shows that confidence is running low, and stronger and stronger medicines are needed to try to restore it. We would rather like to see action to boost investment and innovation through budgetary measures. Our conclusion is that risks remain tilted to the downside (growth and inflation). The devil is in the detail – whether the transmission channels will work better under this new regime, we don’t know.
We hope that the current rally will bring us towards 3250-3300 on the Eurostoxx50 and 2000-2050 on the S&P 500. At those levels we would assess whether to reduce risk further.
Jean-Sylvain Perrig, Chief Investment Officer