NEWS Breaking news

ECB left its key interest rate unchanged

Comment by Stefan Isaacs, Deputy Head of Retail Fixed Interest, M&G Investments

As expected the ECB left its key interest rate unchanged and did the same with its pace of asset purchases.
On the whole the tone remained a dovish one which was met by lower bond yields across Europe, especially in the periphery, and a weaker EURUSD.
Whilst the ECB acknowledged that the growth risks are now more ‘broadly balanced,’ and made small changes to its rhetoric, the key takeaway was one of patience.
The ECB also lowered its inflation forecasts for 2017, 2018 and 2019, at the same time increased the GDP forecasts for each period.
Nothing to change our view that the ECB recognises that the Eurozone economy continues to heal, that unemployment continues to fall, but at the same time with significant slack remaining there is no obvious sign of inflation moving up to their mandate of below but close to 2%. With that in mind the ECB will want to buy as much time as possible to try and ensure that recovery remains a sustainable one.
The ECB will also be aware that beyond 2017 it will find it increasingly challenging to continue with its current pace of asset purchases. That being the case it is logical to provide as much stimulus through 2017 as possible before slowly tapering in 2018.
With the ECB likely accommodative through 2017 and beyond, and short dated bond yields firmly in negative territory, risk assets in Europe, both corporate spreads and equities are likely to be well supported and volatility suppressed.

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