ECB rate cut raises pressure on pension funds

EUROPE – The European Central Bank’s quarter-point rate cut today is likely to increase the pressure on pension funds, analysts said.

“If this helps keep bond yields at these artificially low levels, while doing as little as is likely to boost equity prices in any meaningful manner, it will only increase the pressure on pension funds and insurers who all know they should be moving to a much more prudent asset mix,” said Sean Corrigan, principal at economics consultancy Capital Insight.

The ECB cut its benchmark interest rate to 2.50% today, its lowest level in almost three and a half years. A rate cut was widely expected, though most analysts were expecting a half-point cut.

Pension funds know that they should be incorporating more bonds and fewer equities, Corrigan said.

“But this is only likely to intensify the dilemma of having to bail out of one ‘bubble’ – stocks - too late and into another - in bonds - too early.”

He said that the German banking system, “desperately in need of a little increased net interest margin”, might see some benefit, if it is not forced to give it all back to borrowers by politicians.

He said that while the ECB could justify lower rates by pointing to the 6% appreciation in the euro since its last rate move “its action is likely to do little for business - which needs freer markets, not cheaper credit, to give it room to breathe”.

The Swiss Central Bank cut its rate by half a percentage point to 0.25% while the Bank of England kept its rate at 3.75%.

Nigel Richardson, a strategist at AXA Investment Management, says the ECB rate cut is a step in the right direction, though it was probably not enough.

“Policy seems too slow,” he said, “it’s reactive not proactive.” He likened the current economic situation in the euro-zone to Japan in the early 1990s.

In terms of asset values, he didn’t see the ECB’s action as being the springboard for a recovery. “I don’t think it’s going to kick start the market.” He added it was “quite plausible” for the ECB to go below 2.0%.

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