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ECB throws 'kitchen sink' at problems with expansion of QE's scope

The European Central Bank (ECB) is to grow the scale of its quantitative easing (QE) programme by €20bn a month, expanding it to include a wider range of corporate bonds.

Its six new or amended policy measures – including lowering the base interest rate to zero and the bank deposit rate by 10 basis points to -0.4% – were likened by Patrick O’Donnell, investment manager at Aberdeen Asset Management, to the central bank’s “having thrown the kitchen sink” at the problem.

All rate changes will take effect from 16 March.

He said it was a “big surprise” that non-financial corporate bonds had been included within the remit of the expanded asset-purchasing facility but was uncertain how long the rally the announcement triggered would last.

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Stephen Years, head of fixed income beta at State Street Global Advisors, argued the steps were a realisation by the ECB that it could not continue with its usual approach.

“The programme modifications and the new monetary policy tools embraced by the ECB today are reflective of the view that just pulling harder on the existing monetary leavers open to them is not sufficient to deal with the economic reality within the euro-zone,” he said.

Ian Tabberer, global equity investment manager at Henderson Global Investors, argued that the ECB’s approach risked tackling the wrong areas.

“At the margin, this will help financial assets, [but] it is anaemic demand for credit rather than the cost of supply that appears to be the fundamental issue, and this is creating the low-inflation environment in Europe,” he said.

“We hope these measures can boost confidence but doubt whether monetary policy alone can kick-start the broader European economy.”

He said questions remained whether the impact on the euro, down following the ECB’s decision, would in fact have a positive impact overall.

“If these measures do lead to a weaker euro relative to other global currencies, it must be remembered that, in a global context, this is a zero-sum game,” he said.

“Easing of pressures in one region may be creating pressures in another. There are no easy solutions, and the longer-term impacts of this announcement are likely to be complex.”

Meanwhile, Neil Williams, chief group economist at Hermes Investment Management, was uncertain whether the actions of central bank governor Mario Draghi would have the desired effect, noting that the rate cuts were an indirect route to growth.

“Either way,” he added, “while helpful in addressing the symptom, deflation, Draghi cannot alone solve the underlying problem – a monetary union devoid of economic union.

“This will take years. And, meanwhile, the euro remains a currency in search of a government.”

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