Having failed to live up to expectations late last year, the ECB today stepped up with stimulus that actually went beyond what was anticipated. The cut in the deposit rate further into negative territory was expected, and that now stands at -0.4% (previously -0.3%). However, they also shaved the final 5bp off the main refinancing rate, taking that to 0.00%, while the marginal lending facility rate was also lowered. And by expanding the pace of asset purchases to 80 billion euros a month, adding corporate bonds to the pool of available debt it could purchase and announcing new four year loans for banks, Mario Draghi also went slightly beyond what was anticipated prior to the announcement. In a Bloomberg survey released earlier this week, the median estimate was that the ECB would expand its QE program by 15 billion, while only 27% thought that corporate bonds would be added to the pool of available assets.
The good news from a global growth point of view is that by exceeding expectations the ECB is clearly trying hard to accelerate growth in a region that still has a lot of spare capacity. And the early moves in the euro and equites suggests that markets are a lot more enthused by this announcement than that of the BoJ earlier this year. The bad news, though, is that this could be the final throw of the dice, as it’s hard to envision that there’s much left in Mario’s cart of monetary tools. We still think that fiscal stimulus would be a much more effective tool to stimulate the eurozone economy at the moment. If growth fails to pick up as 2016 rolls on then governments will come under even greater scrutiny to ditch austerity in favour of stimulus. And even the near 2% growth we forecast for 2016 would still leave a wide output gap by the end of the year.
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