Schroders Quickview: Draghi disappoints

Draghi confirmed that purchases will take place at least over the next two years, but disappointed investors by not confirming the size of purchases.

Investors had hoped that the ECB would step-up stimulus plans after the recent weakness in both growth and inflation data, either by announcing a very large amount of purchases, or the addition of sovereign debt purchases. However, Draghi merely confirmed previously announced measures, but without revealing the scale of the programme. In the past Draghi had signalled that he would like the ECB’s balance sheet to return to the peak seen in 2012 (which would imply an additional €1.1 trillion), however, he played down the notion of returning to past peaks – a sign that the governing council either did not support the notion, or that it understands that it may not be possible.

The problem the ECB faces is that the pool of assets being targeted is too small to make a major impact on the economy. The available stock of ABS is approximately €250 billion while the available stock of covered bonds is approximately €650 billion. However, these figures also include sub-standard issuance, which the ECB has ruled out buying. We believe the ECB is aware of this problem, which is why it has not set a purchase target. As a result, European equities and bonds are trading lower (in price), while the euro has appreciated slightly.

Overall, today’s ECB meeting confirms that governing council is now in wait-and-see mode. Purchases of private assets will begin in the near future, but policy makers will want more time to assess the impact of all of the measures announced in recent months. However, Draghi was keen to emphasise that the governing council was unanimous in their support to add further unconventional measures if needed. The clear message is that monetary policy in Europe will remain loose for a very long time, which contrasts with the US and UK, where markets expect interest rates to rise next year.

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