“The European Central Bank announced today that it will embark upon a €60bn per month quantitative easing programme, in which it will buy government bonds according to the ECB capital key. This follows a long line of clear signals from Central Banks policymakers in recent months. The programme will last until the end of September 2016 and will be continued until the ECB achieves price stability (defined as close to 2%). The ECB clearly feels that its price stability objective is under threat due to falling prices and it is expected that the measures undertaken today will assist in generating inflation in the Eurozone.
Markets have reacted by focusing on the size of the QE package and the impact that a such large buyer of bonds will have on the market. We believe that in the short-term QE could force European government bond yields lower, meaning that investors will increasingly look for higher yielding investment opportunities. As a result, investment grade and high yield bonds could benefit from today’s announcement. In addition, the euro will likely come under increased pressure as European investors seek to invest globally in their hunt for a positive yield.
Over the longer-term, we believe that government bond yields will increase as today’s measures start to have a positive impact on inflation. We expect to see an improvement in the ability of European non-financial corporations and households to access credit which should boost demand. Additionally, any fall in the Euro could increase import prices and thereby inflation. It would also boost export production and therefore economic activity. With greater prospects for inflation and growth, European government bonds will likely come under pressure.
The ECB was late to the central bank liquidity party but it got there in the end. Arguably, the most powerful action is the commitment to continue QE until price stability returns to the Euro area. By embarking on QE, the ECB has signalled to the market that it will do “whatever it takes” to pursue its price stability mandate.”
