ECB manages to make tapering look dovish


The ECB has managed to appear dovish to markets despite the central bank’s announcement that it will halve asset purchases from the start of 2018, with investors noting the decision still represents another €270bn of liquidity injected into European bonds.

Fixed income and the Eurostoxx rallied while the euro weakened slightly after the governing council’s decision was published at lunchtime today.

Interest rates remain on hold in a decision that had been signalled to markets for several months.

Fidelity International global economist Anna Stupytska expects the asset purchase programme to be extended beyond its current deadline of September 2018.

Rate hikes are expected to begin even further beyond that date.

Alcentra chief investment officer Paul Hatfield reckons hiking seems unlikely for “at least another 12 months”, while head of European fixed income at Franklin Templeton Investments David Zahn does not expect it to happen before 2020.

Hatfield adds the door is open to a quantitative easing U-turn.

“[ECB president Mario] Draghi left himself a safety option to crank the printing press back up if things go south for the Eurozone in macro terms.”

Close Brothers Asset Management’s Nancy Curtin reckons Draghi is attempting a difficult balancing act between the single currency and markets.

This slow, steady and widely predicted approach hopes to rein in the euro from rising further, which is limiting the earnings capacity of European exporters, at the same time as avoiding a European taper tantrum in the markets,” she says.

Inflation is hindered by slack in the labour market and political risk remains in the eurozone, Stupnytska notes.

“The Catalan situation in Spain is not to be dismissed. If the associated disruption to activity lasts for longer, the economic impact could be non-negligible, something the ECB might not be able to ignore,” she says.

Structural reform from French president Emmanuel Macron is encouraging, but the impact on growth and productivity will likely only be felt in a couple of years, Stupnytska adds.