Economists mixed on ECB stimulus

March 10, 2016

As markets struggled to digest a fresh round of stimulus from theEuropean Central Bank, economists also clashed in their assessments of the central bank’s new policy measures.

“After all the hoopla about doing more and not standing on the sidelines, the ECB seems only to have barely stepped onto the playing field,” said Robert Brusca, chief economist at FAO Economics. “There is no MVP performance here.”

Others argued that the ECB’s combined measures exceeded expectations, especially after leaving investors disappointed in December.

“This time the ECB delivered big time!” wrote Howard Archer, IHS Global Insight chief European and UK economist. “In fact, it looks like the ECB got hold of a few kitchen sinks to throw, although there may be disappointment in some quarters that there was not a bigger cut in the deposit rate.”

As expected, the ECB lowered its deposit rate further into negative territory to -0.4 percent. It lowered its main refinancing rate by five basis points to zero, a move that took some economists by surprise. The Governing Council also added an additional 20 billion euros to its asset purchase program and announced a new series of longer-term refinancing operation (TLTRO II) to be launched starting in June.

“The ECB went all out today with a comprehensive list of measures that compensated for a modest cut in the deposit rate of just 10 bp,” Action Economics said in a note.

The euro initially weakened on the announcement, with economists at Barclays noting “the ECB is willing to use nearly all of it levers against a deteriorating inflation outlook.” Then it reversed course on comments from ECB President Mario Draghi, during a news conference with journalists, suggesting further rate cuts were unlikely.

“From today’s perspective and taking into account the support of our measures to growth and the return to our price stability objective, we don’t anticipate it will be necessary to reduce further rates,” Draghi said. “Of course, new facts can change the outlook.”

Economists at Societe Generale said Draghi was admitting that the central bank was running out of policy options when it comes to ultralow interest rates.

“Draghi’s comments on the complexity of introducing a tiering system and not wanting to signal that rates could go down significantly further, as well as his emphasis that there is now a shift away from cutting interest rates, suggest that we are close to the ECB’s view of the lower effective bound,” the group wrote in a note.

FAO’s Brusca agreed that negative market sentiment reflected a lack of future policy options from the ECB as central banks struggle to control market expectations.

“It looks like it’s reaching the end of what they could do,” he said.

But Draghi, in Thursday’s news conference, dismissed the notion that the central bank was out of ammunition. SGH Macro Advisors agreed, saying markets were missing how effective the ECB’s broad-based measures could be.

“Indeed, in pushing its stimulus deeper into the banking system, credit markets, and peripheral countries, the ECB may have delivered a rather powerful — and desperately needed — boost to the real economy,” SGH Macro Advisors wrote in a note.

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