As widely expected, the European Central Bank approved a new stimulus package on Thursday, cutting interest rates and stepping up bond purchases, without an end date, to support economic growth and inflation expectations. In addition, the central bank announced a tiering system to mitigate the negative impact on the banking sector. Although this will support the current risk-on environment over the short term, the actual game changer would be an ambitious and credible programme of fiscal easing in Europe.
The ECB has revised down its growth and inflation forecasts for 2019, 2020 and 2021. Falling inflation, Germany flirting with a recession and a global trade war have impacted domestic confidence and made the central bank reactivate its monetary efforts.
The ECB has delivered, with a broad monetary easing package. All levers, including the deposit rate cut, the tiering system, the QE and the conditionality on forward guidance, have been activated. If some measures have been at the lower end of the expectations, these have been counterbalanced by a QE programme that is not dependent on the calendar, but on the state of the economy.
The ECB hasn’t let markets down, confirming the positive tactical view on equities that we have been implementing since August 6th and more recently by increasing our global equity exposure via EMU and emerging markets. However, the Federal Reserve’s communication next Wednesday will be another key event, during which its key interest rate will probably be cut by another 25 bps. The real game changer will nevertheless have to come from fiscal policy. Perhaps the German ‘Climate Summit’ next Friday will open the door to some fiscal stimulus.