ECB steps up the dovish rhetoric

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By Jaisal Pastakia, Investment Manager at Heartwood Investment Management

It is unlikely that further easing action will be taken at this week’s monthly ECB policy meeting, but we might see more dovish commentary. Prospects for European Central Bank (ECB) quantitative easing are looking higher as policymakers’ rhetoric continues to build.

ECB Vice President Constantio stated last week that the ECB would have to assess the situation in the first quarter in 2015 and if there was no progress the Bank would “consider buying assets, including sovereign bonds in the secondary market.”

This follows November’s ECB policy meeting which left the door open to quantitative easing, when President Draghi reassured the market of the unanimity of policymakers’ intention to expand the ECB’s balance sheet to €3trn through asset purchases and the targeted-long-term refinancing operations.

ECB policy support should help to raise eurozone growth expectations in 2015. Meanwhile, more evidence is showing economic data stabilising. Bank lending to non-financial corporates has been depressed, but it increased by nearly €28 billion in September from the previous month, while the rate of decline on a year ago has slowed.

It’s early days, but now that the ECB’s Asset Quality Review and stress tests are out of the way, we should see more appetite for lending in conjunction with an easing of credit standards, as evidenced in the ECB’s October Bank Lending Survey.

More encouraging growth signs are also emerging out of Germany, which suffered a setback over the summer. We continue to await stronger manufacturing data – the latest third quarter German GDP data showed lagging business investment versus relatively strong consumer spending and robust export growth. However, investor confidence and business surveys (ZEW and IFO) are improving and the unemployment rate continues to make record lows.

Furthermore, export-orientated economies, such as Germany, should start to benefit from the positive effects of a weaker euro, which is back to July 2012 levels versus the US dollar.

There has also been some progress on the structural reform front. Last week, Italy’s Lower House passed difficult but important labour market reforms to lift heavy protections on permanent employment contracts, with the aim of supporting job creation.

The recovery in the eurozone remains slow progress and it’s a bumpy path, but we believe it remains on course for providing a supportive backdrop to asset prices in 2015.


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