Now that the markets have had some time to digest the ECB’s Thursday stimulus barrage, they’ve decided they like it, but worry that there may be very little more to come.
"Nice stimulus, shame about the commentary," seems to be the gist of the European Central Bank’s reviews, NewsMarket reported.
Now analysts have had some time to chew over Thursday’s stimulus package, opinions are seriously split. There’s unanimity that President Mario Draghi and company have ‘overdelivered’ by cutting key lending rates, increasing the size and scope of their bond buying and throwing a new liquidity lifeline to banks.
To recap, the ECB lowered its refinancing rate by five basis points—to zero—a move that took some economists by surprise. The Governing Council also added an additional €20 billion ($22.21 billion) to its asset purchase program and announced a new series of longer-term refinancing operation or TLTRO 2, to be launched starting in June.
However, Draghi was also unusually clear in his attempts to convince markets that there may be no more rate cuts. This blunted the post-decision stock rally and has bred a feeling that the stimulus program was only given the OK by some uneasy eurozone member states, most obviously Germany, on the basis that it would be the last of its kind.
Opposition
Economists at Societe Generale, for example said Draghi was admitting that the central bank was running out of policy options.
“Draghi’s comments on the complexity of introducing a tiering system and not wanting to signal that rates could go down significantly further, as well as his emphasis that there is now a shift away from cutting interest rates, suggest that we are close to the ECB’s view of the lower effective bound,” the group wrote in a note.
ADM Investor Services’ respected London strategist Marc Ostwald was of similar mind. While Draghi’s observation that there are limits to how low rates can go was perfectly “honest”, and “perfectly true,” Ostwald wrote that it was also “as much of a mistake in communication terms as the ‘under delivery’ of new policy measures was in December.”
“It probably reflects the point that Draghi made a grand bargain with the council majority of one last big policy move, but no more,” he concluded.
There were some more upbeat notices:
“This time the ECB delivered big time!” wrote Howard Archer, IHS Global Insight chief European and UK economist.
“In fact, it looks like the ECB got hold of a few kitchen sinks to throw, although there may be disappointment in some quarters that there was not a bigger cut in the deposit rate.”
SHS Macro Advisors wrote that, “the ECB may have delivered a rather powerful—and desperately needed—boost to the real economy.”
Bank of America Merrill Lynch was in Draghi’s corner too. “The ECB delivered a package right at the top end of expectations,” its analysts wrote.
“For equities, cushioning banks from negative rates, giving them more liquidity and buying credit are all good news,” they went on.
The US bank also thinks that the doubters will come around. They note the rather limited global market response to such a hefty package of stimulus. “We think the longer term reaction will be positive,” they concluded.
Rabobank, meanwhile attempts to answer the big question—will this package lead to return of confidence in the ECB’s policy by the markets?
Sadly its European economics team doesn’t provide the sort of clear answers investors like, and also suspect that the ECB will struggle to get still-lower interest rates past its doubters.
“Although we are positive about the TLTROs, the gains from this program will be slow,” they wrote on Friday.
“The particular choice of policy measures would seem to indicate that from now onwards, markets may have to adjust to an environment where resistance to further rate cuts is significant,” Rabo concludes.
