Scepticism is growing over the effectiveness of the European Central Bank’s efforts to kick-start the economy as concerns over banks’ profitability and access to liquid assets take centre stage.
Last week, ECB president Mario Draghi unveiled plans to cut rates on the bank’s deposit facility by 10 basis points, bringing it to -0.4 per cent. This means EU lenders effectively have to pay a premium to store money with the central bank.
The ECB also cut its benchmark interest rate by 5 basis points to 0 per cent and expanded its asset purchase programme by €20bn to €80bn, starting from April.
As part of the extensions the ECB will now include non-bank corporate bonds in the asset purchase programme.
Experts say while the stimuli will likely be well received by equity markets, the benefits to the real economy are questionable.
Tilney Bestinvest managing director Jason Hollands argues QE may have resulted in a “misallocation of capital from the real economy”.
While Hollands remains positive on European equities, he says structural reforms to recapitalise the banks, reduce regulatory red tape and cut firms’ tax bills are needed to stimulate growth.
Henderson Global Investors global equity investment manager Ian Tabberer says the longer term impacts of the ECB announcement are “likely to be complex”.
He says: “If these measures 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. Easing of pressures in one region may be creating pressures in another.”
With the ECB pushing further into negative interest rate territory, commentators argue the key uncertainty continues to lie with the ability of banks to supply credit to households and corporates.
Axa Investment Managers senior economist Maxime Alimi says: “The ECB is hoping the additional pressure from a lower deposit rate will incentivise banks to ‘play the game’ by lending more.
“Recent liquidity operations delivered low take-ups, however. If banks will not or cannot lend more for economic, business or regulatory reasons, they will not be in a position to extend more loans and offset the cost of negative deposit rates. The new package may prove a mixed blessing for earnings.”
Insurers may also be a sector to watch, says AJ Bell investment director Russ Mould.
He says: “Holding interest rates down and crushing bond yields may help borrowers but it does not help the insurers who need to generate dependable returns on their portfolios so they can meet their long-term liabilities.
“That said, record-low rates may force consumers to save more so assets under management could at least benefit.”
But experts say the corporate bond market is the clear winner from the new ECB measures.
Pioneer Investments head of European fixed income Tanguy Le Saout says demand for corporate bonds could hit €5bn per month.
He says: “This demand will act as a strong support for current spread levels and should see corporate bonds outperforming their sovereign counterparts.”
Julius Baer head of fixed income research Markus Allenspach says the ECB’s measures will be “constructive” for credit markets, but suggests the central bank may need to purchase “a material percentage of bonds” to make the asset purchase meaningful.
However, Kames Capital fixed income specialist Adrian Hull warns: “With the ECB’s decision to start buying corporate bonds, the situation for the banks searching for liquid assets becomes more dire. At this juncture, a lot of questions remain open.
“The latest move of the ECB has failed to give a clear direction to the bond market. We still prefer the US dollar market as the direction of the Federal Reserve seems more predictable to us.”