News

Last week the European Central Bank (ECB) announced a broad range of measures to try and stimulate bank lending and to boost inflation/avoid deflation in the Eurozone. For example deposit rates have been cut and are now in negative territory. This has been done to discourage banks from leaving money on deposit at the ECB. They also announced measures to provide banks with cheap fixed term funding and ensure there are no liquidity constraints to impede them from lending to companies and individuals.

None of the announced measures were particularly surprising but the fact they were announced all together was a surprise.  Of course there are those who were hoping for even more, in the shape a large scale ‘quantitative easing (QE)’ programme, from the ECB. We still think this is unlikely but even here Mario Draghi, the President of the ECB, gave some cause for optimism saying “if need be, within our mandate, we aren't finished here”.

We believe, in the near term, this announcement is likely to be more positive for markets than for the real economy. We expect it to support European equities, especially European banks. Longer term the ECB’s asset quality review, later this year, will be the key step for dealing with remaining concerns about the financial stability of banks.  If this is positive the banks should be more confident to extend more lending thereby supporting the Eurozone recovery.