ECB actions against deflation welcomed

The European Central Bank’s (ECB) moves to prevent deflation in Europe have been broadly welcomed by investment experts. The ECB has become the first major central bank to introduce negative deposit rates for banks and is working on a form of QE for asset-backed securities and has announced targeted longer-term refinancing operations (LTROs). It will also no longer sterilise liquidity created by its Securities Markets Programme.

BlackRock head of global fundamental fixed income, Scott Thiel, said that moves should be positive for European banks. But Thiel added that BlackRock is cautious over peripheral European government bonds following recent spread compression. He added: “We see the potential for volatility and liquidity issues to arise once markets begin to focus on the large imbalances that have occurred from rates being so low for such a very long time, particularly by the US Federal Reserve and the Bank of England.”

Aviva Investors said the decision to stop sterilising the Securities Market Programme could be paving the way to QE and was a surprise. F&C chief economist, Steven Bell, said that while the ECB’s announcements had been talked about in the markets, their full scope had led to a positive equity reaction. Bell added: “Having pushed as hard as they can, the ECB must now sit back and wait to see if the economy responds. So far, the weaker euro is encouraging but only time will tell if there is broader economic response.”