European Central Bank president Mario Draghi today announced the much-discussed asset-backed securities purchase programme against the backdrop of a surprise cut in interest rates.
Speaking in Frankfurt today, the ECB announced a swathe of measures to help support the European recovery.
At the forefront of plans was to begin purchasing non-financial asset-backed securities in October to help ease credit flows. This is coupled with buying euro-denominated covered bonds.
The purchasing measures, which followed the surprise decision to cut the refinancing rate from 0.15% to 0.05%, are designed to complement the introduction of Targeted LTROs in June.
While Draghi admitted these decisions were not unanimously agreed upon by the ECB board, do they find favour among the fund manager community? Citywire Global canvassed leading investors to find out.
Opens the door for action
Citywire A-rated Iain Stealey of JP Morgan Asset Management told Citywire Global he believes Draghi thought it was time to make a statement on growth and, while his actions may have surprised, there still could be more to come.
'This is the first step and there will be more monetary easing to come. The question is why did he choose now? The ECB was looking at how the LTRO worked out and realised how inflation expectations had fallen and anaemic growth was getting too worrisome.'
'Draghi understood he couldn’t just wait and ultimately he'll have to do some more. He also doesn't want governments to have a free ride. He is using his accommodative polices to channel spending towards productivity and showing the ECB is independent.'
'He surprised me with these decisions. These measures weren't priced into the market. Italian and Spanish yields are 10 basis points tighter to Germany; German yields are rallying, especially in the front end. He is trying to get on the front foot and take some bold action.'
Surprises all round
Neuberger Berman’s Andrew Wilmont, who specialises in high yield bonds, said both the purchasing and the rate cut announcements had caught investors unawares.
'The expectation was that Draghi would talk about increasing the ABS plan - potentially going for a larger program of quantitative easing - but not actually do anything at the moment.'
'This rate reduction is also actually a bit of a surprise even though it’s a small reduction. It’ll be interesting to see how it’s going to be taken in the market. On the one hand rates are clearly lower for longer, but should we be worried that the situation in Europe in terms of deflation is more precarious than we initially thought?'
Mind over matter
Financial bonds specialist and Citywire AA-rated manager Anthony Smouha of Geneva-based boutique Atlanticomnium told Citywire Global the rate cut was done as a psychological measure.
'The rate cut was something of a surprise and I think it was a psychological move to further encourage growth in Europe, which will be positive for financials regardless of the asset-backed programme. This will go some way to creating easy conditions for banks to enact further lending to companies and promote growth in Europe.'
'Banks are under a lot of pressure to strengthen their balance sheets but they are also being encouraged to lend to the real economy. This is supposed to build on what we heard around the targeted LTRO programme from earlier in the summer and we have begun to see some lending getting through to the real economy in markets such as Italy.'
Still got shocks in store
Nic Hoogewiks of BNP Paribas Investment Partners’ rates team said Draghi managed to beat market expectations despite several sign posts being set at the June meeting.
The ECB surprised markets today by lowering its main policy rates further by 0.1%. President Draghi commented that following the June rate cut for all practical purposes the lower bound on the main ECB policy rates had been reached although some technical adjustments could not be excluded. During the Q&A today Draghi restated that following today’s rate cuts the lower bound on the policy rates has now been reached.
In addition to the rate cut the ECB also decided to start a purchase programme of ABS (including RMBS) as well as a new covered bond purchase programme. This comes less as a surprise given that the ECB announced in June the preparatory work on that programme was intensifying. At the press conference the ECB declined to provide details on the size of the programme.
The decisions at today’s meeting were not unanimous. Draghi argued the rate cut and the purchase programmes complement the package of measures announced in June. The additional measures were triggered by the weakening of the economic outlook of the eurozone economy since the June meeting.
On balance the ECB over delivered versus market expectations. Peripheral yields tightened, forward eonia rates hit fresh lows and the euro weakened further. The strong weakening of the currency this year is contributing to raising long term inflation expectations. The package of measures announced further eases credit conditions.