The ECB's decision to implement negative deposit rates and launch targeted LTRO went nowhere near far enough if Draghi is serious about tackling the deflationary threat.
In an analysis piece titled ‘Less Than Zero’, Høien criticised Draghi over the measures, and said a 10bps cut in the deposit rate would have little real impact beyond grabbing headlines.
‘The 5 June announcement was food for thought for macroeconomists, not fertilizer for the economy. A deeper cut in the deposit rate and a much more aggressive liquidity policy are necessary if the ECB thinks that inflation can be hiked by monetary easing,’ the Stavanger-based manager said.
‘I do think that ECB will cut policy rates further, eventually testing a -0.5 percent deposit rate. Even if further rate cuts are off the table, I expect the ECB to provide more liquidity.’
Høien also questioned how effective the targeted LTRO programme, designed to aid bank’s balance sheets, would be as there was no clear mention of what level of demand there was for this in the market.
Asset purchases problem
Therefore, Høien said it would be more likely that the ECB, as the central bank has previously suggested, would step up efforts to access to purchase assets, but he questioned whether it would target the asset-backed market as planned.
‘I expect the ECB to change the rationale for assets purchased, by stating that in order to fix the monetary policy transmission process, the central bank need to determine the amount of liquidity exogenously.
‘The way to do that is by purchasing assets and decide how long to hold these assets on the ECB’s balance sheet. The ECB has used a similar type of argument for other unconventional and policy initiatives.
‘They can also argue more forcefully that in order to get inflation back on the mandated track, market interest rates need to be anchored in the ECB’s policy rates.’
Due the relatively small size of the ABS market, Høien said Draghi would be better off looking at the eurozone sovereign debt market.
‘Since the market for asset-backed securities is underdeveloped in Europe, the ECB will probably prefer large scale purchases of Eurozone sovereign bonds, most likely proportionate to the size of the various 18 national economies. Another word for this is traditional QE.’
The Skagen Tellus fund has returned 13.8% over the three years to the end of May 2014. This compares with a 6.84% return by the average manager in the Bonds – Global sector over the same period.