ECB April Meeting

The governing council left the key ECB interest rates and the pace of asset purchases unchanged at its April policy meeting:

• Main Refinancing: 0.05%
• Deposit Facility: -0.20%
• Marginal Lending facility: 0.30%

PSPP programme and Rate:

• President Draghi, although visibly upset after a brief attack by a protester, remained on track regarding ECB policy strategy, reaffirming the ECB's determination to continue its asset purchases until the Governing Council saw “a sustained adjustment in the path of inflation”.
• He confirmed that the ECB would not cut the deposit rate further into negative territory.

Economy:

• The tone of the statement was more positive. The economy has gained further momentum and the recovery looks set to broaden and gradually strengthen, although growth continues to be dampened by several factors. Whilst still on the downside, risks to the economic outlook have become more “balanced”. Inflation is expected to remain very low or still negative in the months ahead and the ECB will monitor inflation risks very closely. Inflation rates are expected to rise later in 2015 and increase even further in 2016 and 2017.

Scarcity :

• Mr Draghi sounded confident about the ECB's ability to buy bonds at the target pace (€60 billion per month) as concerns over scarcity were deemed “a little exaggerated” or “premature,” on the grounds that these were not supported by the evidence. After the press conference, the ECB expanded the list of agencies whose securities are eligible for the purchase programme to encompass ten new institutions. There are several French and Dutch names (notably France’s CDC and AFD), as well as Italy’s Cassa Depositi e Prestiti.

Overall, the ECB remains unmoved by recent talk of an “early exit” and “bond market scarcity”, giving the impression that it has decided, for now at least, to keep the road map unchanged.

Market impact

ECB measures on liquidity

• The liquidity package (TLTRO, PSPP programme), combined with the negative deposit rate, will anchor euro-zone government bond yields in negative or low-level territory. Lower borrowing costs and a weaker currency could help boost both growth and inflation in the euro zone.
• All these measures will keep the short-term rate at a very low or negative level for a long time to come and put pressure on our benchmark (the Eonia).

Money Market Investment strategy

This meeting confirms that monetary policy will remain accommodative for as long as necessary. Our funds are oriented so as to outperform our benchmark under such market conditions:

• we favour positively yielding peripheral countries (Spain, Italy) vs. Europe’s core countries;
• we are overweighting credit and seeking greater-yielding issuers (with a minimum short-term rating of A2/P2);
• we are imposing optimal duration allocation on longer maturities.

Pierre Boyer
Head of Money Market fund management