The European Central Bank (ECB) appeared to have little option but to increase its stimulus measures today if it wanted to avoid disappointing markets. However, the increase was towards the upper end of expectations. At the rate of purchases seen so far, the ECB would have run out of capacity within the PEPP in the autumn if it had continued to purchase at the rate seen so far. Unless the purchases are accelerated, the ECB should now be able to keep buying into early 2021. This is ultimately important as a sign post that the ECB is committed to stimulating for as long as is necessary. It also suggests that they are not unduly concerned about German Constitutional Court interference in the quantitative easing programs.
President Lagarde had opened the path to further easing with her prior comments about the economy taking a path somewhere between the ‘medium’ and ‘severe’ case scenarios. Importantly for the ECB, it seems Mario Draghi’s persistent refrain regarding the need for fiscal stimulus has finally been heard by European governments. Germany added to its stimulus package on Wednesday, following closely on the heels of an ambitious plan from the European Commission for a wider EU stimulus. The ECB no longer has to shoulder the responsibility for lifting European growth and inflation by itself.
The scale of the increase saw the euro rally in the moments after the announcement. Italian government bond yields fell around 20 bps from where they had been pricing immediately before the release, back to levels seen in January before the global pandemic really took hold. European equities jumped to break a losing run for the day as the ECB gave another boost to follow the strong rotation into European stocks seen in recent days.
Oliver Blackbourn, Multi-Asset Portfolio Manager at Janus Henderson Investors