Limited impact of looser monetary policy

Schroders’ head of UK and European Equities, Rory Bateman

Eurozone data over recent weeks has been disappointing and market expectations were for the European Central Bank (ECB) to make a notable response at the 10 March meeting.

The policy measures were indeed substantial but a disappointing market reaction indicates concern around the effectiveness of ongoing monetary expansion.

As expected Mario Draghi delivered a 10 basis point cut in the deposit rate from -0.3% to -0.4%.

The scale and scope of quantitative easing (QE) was increased substantially from €60bn to €80bn per month with investment grade corporate bonds now included in the purchase programme.

In addition Draghi highlighted a continuation of QE and very loose monetary policy until the 2% inflation target is achieved.

Perhaps the most radical change came in the form of ‘TLTRO II’ – another round of targeted long-term refinancing operations whereby the banks will be paid to take financing from the central bank depending on the size of their loan books.

The rate they pay (i.e. receive) can be as low as the deposit rate of -0.4% depending on how much credit the banks extend.

This is uncharted territory that offsets the pain from negative interest rates that the banks have been complaining about and is designed to further stimulate lending to the real economy.

The ECB’s growth forecasts were reduced from 1.7% to 1.4% for 2016 whilst the headline inflation forecast for this year was also reduced to just 0.1%, primarily given the decline in energy prices.

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