Even with rate cuts, additional asset purchases and new targeted longer-term refinancing operations (TLTRO), the ECB monetary policy “Bazooka” wasn’t enough to lift risk assets overnight.
While the amount of policy easing provided by the ECB beat the vast majority of analysts forecasts, it was the admission from ECB president Mario Draghi that further rate cuts may not be forthcoming that set the cat among the proverbial pigeons, sparking a sharp reversal in risk assets and sending the euro screeching higher.
After such a promising start, to many, all of the good work was undone in an instant. Some even interpreted the remark from Draghi – whether scripted or unplanned – as an admission that monetary policy as a tool to spur on growth was now largely ineffective.
Despite the initial market reaction, Andrew Bosomworth, managing director and portfolio manager at PIMCO, doesn’t share that view, suggesting in an opinion piece written overnight that the ECB was far from running out of policy ammunition.
Here’s the three key take-outs Bosomworth took from the ECB’s policy decisions.
First, negative interest rates as a tool of monetary policy are effectively exhausted. Second, asset purchases and credit easing will do the heavy lifting of policy stimulus going forward. And third, the ECB is focused on the domestic credit channel to kick-start growth rather than lowering the euro.
In his opinion asset purchases, rather rate cuts, will be used to stimulate the economy should the need arise, with the bank focused on lowering borrowing costs for the private sector rather than weakening the euro.
On top of the high-grade non-financial corporate debt the ECB will now buy as part of its easing program, Bosomworth suggests there’s still a large amount of assets that the bank could still theoretically purchase.
“By adding corporate bonds to its list of government, agency and covered bonds as well as asset-backed securities, the ECB is now firmly in the realm of credit easing,” says Bosomworth. “And now that it has started with corporate bonds, blue-chip equities are not a far step away, if ever needed.”
Stocks, corporate debt, government debt, asset-backed securities. That sounds fantastic for financial assets, and would bring the ECB roughly in line with the QQE program currently being conducted by the Bank of Japan.
However, as has been seen with the Japanese economy over recent years, while asset purchases have helped bolster asset prices, the trickle down effect to the real economy has been less than stellar.
In the end that’s what investors want to see, a self-sustaining economic recovery where asset prices are rising on improved growth prospects rather than central bank purchases.
Until that is seen, concerns over the effectiveness of ever aggressive monetary policy easing are unlikely to be displaced.
You can read Bosomworth’s full assessment of the ECB policy decision here.