The European Central Bank reduced its interest rates to 0.15% from 0.25%, in order to encourage economic growth and stave off inflation.
It is hoped the move will encourage European banks to start lending to businesses again and replicate the success of the Funding for Lending scheme in the UK. The ECB also lowered the deposit rate to -0.1% to 0%. At the same time, the Bank of England maintained status quo position with respect to its interest rate as well as the size of its asset purchase facility.
Economists welcomed the European measures, but said it may not be enough to kick-start the economy again. This morning it was confirmed that the Eurozone GDP expanded by just 0.2% in the first quarter of this year.
“Today’s ECB moves are a step in the right direction, but look too little, too late to snuff out deflation risk and kick-start growth, said Neil Williams, Group Chief Economist at Hermes Fund Managers.
“The 10 basis points shavings off the refinancing and deposit rates are puny, and look more cosmetic than real. Any drop in the euro on the back of them would be welcome, but possibly short lived. Draghi’s hesitancy to use all his bullets today reflects how empty his policy tool box is. With demand subdued and the likelihood at some stage of rising bond yields, the ECB will have to capitulate on quantitative easing.”
JP Morgan Strategic Bond Fund Manager Nick Gartside was more upbeat and said that the markets were awarded most of the elements on the shopping list; including a rate cut, a targeted long-term refinancing operation and asset-backed securities purchases.
“It’s a relatively comprehensive set of policies and the ECB have handled this well in our view,” he said.
“In terms of the investment implications, higher yielding European fixed income assets still look attractive. We have liked these assets and today’s announcement reinforces that. Our highest conviction areas continue to be in the periphery bond markets, such as Spanish and Italian bonds, and European high yield bonds.”
Andrew Mulliner, portfolio manager at Henderson Global Investors said the impact on credit creation and inflation will only likely be boosted in the medium term, but confirmed the positive impact on peripheral government bond markets.
