The European Central Bank (ECB) will expand its quantitative easing (QE) programme by €20bn per month to €80bn and will cut its interest rates to prevent ultra-low inflation becoming a permanent fixture within the economy, it was announced earlier today.
Following the ECB’s policy meeting, president Mario Draghi declared that it will cut its main interest rate from 0.05 per cent to 0 per cent and its bank deposit rate from negative 0.3 per cent to negative 0.4 per cent. It will also allow the ECB’s asset-purchasing programme to include investment-grade, euro-denominated non-bank bonds.
Despite being a popular market in 2015, investor sentiment towards Europe has slumped somewhat since the start of the year as investors have grown sceptical about the ECB’s ability to continue easing monetary policy and delaying the economic cycle for much longer. Sentiment was further bruised by a growing concern regarding the welfare of large European banks.
Performance of indices in 2016
Source: FE Analytics
At the end of last year the ECB had also left many investors disappointed after Draghi failed to meet expectations in terms of expanding the region’s QE programme and further dampened sentiment. 
Now though, it seems that the ECB president has largely exceeded expectations, leading to a rally in regional equities, a sharp drop in the euro and positive sentiment from investment professionals and fund managers overall.
“Having been stung in December by disappointing market expectations, it was important that Mr Draghi did not make the same mistake twice,” Ian Kernohan (pictured), economist at Royal London Asset Management, said.
“Since then, we have seen a major spike in financial market volatility, a fall in eurozone inflation, some weakness in the main eurozone business surveys and cuts to global growth forecasts.”
“The initial reaction of markets was very clear. Draghi’s comment at the press conference that he thought further rate cuts were now unlikely, reversed this initial reaction. Looking through these very short-term reactions, however, the proof of the pudding will be a rise in eurozone inflation expectations and a further pick up in lending growth.”
Other investment professionals are more optimistic generally as they believe the ECB has succeeded in treading the fine line between providing more accommodative money policy while also minimising pressure on the region’s banking system.
Stefan Isaacs, deputy head of M&G’s retail fixed interest team, says the jump from €60bn per month to €80m in asset purchasing was the biggest surprise, which he explained has mostly been implemented to allow for the purchasing of investment-grade euro-denominated bonds.
“This is something of a surprise given political sensibilities, previous disagreement between doves and hawks on the council, and debate as to the legality of buying corporate bonds,” he said. “Not surprisingly this has been well received by the bond markets with credit spreads gapping lower in response.”
“In delivering more than the market’s expectations the ECB should help confidence, encourage increased lending and raise inflation expectations.”
This sentiment is shared by Tilney Bestinvest’s Jason Hollands (pictured) who, while generally adopting a cautious stance at the moment, has been more positive on Europe as a region to invest in and remains so following the announcements. 
Despite an immediate bout of volatility following the news (the market initially soared then slumped following implications that rate cuts may finally cease), he says that the ECB’s “machismo” approach is likely to be favoured by investors and should boost the health of markets overall.
“This should be well received by the equity markets, which love the sugar rush of ever more liquidity, while weighing on the euro currency,” he explained.
“Whether it benefits the real economy is another matter altogether, as scepticism is growing over the effectiveness of QE as a policy tool. Where it has been introduced, QE has been very supportive to asset prices but arguably has resulted in a misallocation of capital from the real economy.”
Despite potential economic headwinds on a wider scale, the managing director says the combination of accommodative monetary policy and low energy prices are positive contributing factors for the health of the European market.
“However, what the eurozone economies really need are a recapitalisation of Europe’s banking sector, greater structural reforms, less red tape and lower taxes,” he added.
There are a number of professional investors who, while encouraged by the ECB’s announcement, share Holland’s sentiment that more still needs to be done to bolster the region’s underlying economy, pointing out that a boost to the markets won’t solve all of the headwinds currently facing Europe.
Alex Dryden, global market strategist at JP Morgan Asset Management, says the package offered by the ECB will help regional growth by weakening the euro and providing relief to banks, but believes that this won’t remedy issues in the region over the longer term.
“These latest steps by the ECB take regional monetary policy close to its realistic limit, [but] Draghi cannot drive the region forward alone however. Fiscal policy will, at some point soon, have to step in to assist regional growth,” he said.
“However it’s quite clear that after significant disappointment following December’s ECB meeting, ‘Super Mario’ has struck back today.”
Henderson global equity investment manager Ian Tabberer agrees that the announcement is a clear positive surprise, but like Dryden he encourages investors to keep track of the bigger macroeconomic picture, both within the region and globally.
“Whilst we believe that at the margin this will help financial assets, it is anaemic demand for credit rather than the cost of supply that appears to be the fundamental issue and this is creating the low inflation environment in Europe,” he pointed out.
“We hope these measures can boost confidence, but doubt whether monetary policy alone can kick start the broader European economy.”
“If these measures do lead to a weaker euro relative to other global currencies, it must be remembered that in a global context this is a zero-sum game. Easing of pressures in one region may be creating pressures in another. There are no easy solutions and the longer-term impacts of this announcement are likely to be complex.”
Taking a more negative view, Stephen Yeats, EMEA head of fixed income beta at State Street Global Advisors, is sceptical towards the region despite jubilation from many investors.
“The programme modifications and the new monetary policy tools embraced by the ECB today are reflective of the view that just pulling harder on the existing monetary leavers open to them is not sufficient to deal with the economic reality within the eurozone,” he warned.
Other investors also say the ECB is using everything it has left to bolster sentiment and improve markets, but believe that these extreme measures are finite and cannot continue to prolong Europe’s economic cycle forever.
Wouter Sturkenboom, senior investments strategist at Russell Investments, says that a second round of Targeted Longer Term Refinancing Operations (TLTRO) and the inclusion of investment grade credit in Europe’s asset-buying programme was the most surprising announcement following the meeting.
However, he says the fact that the central bank is going above and beyond expectations in terms of policy isn’t a sustainable fix over the long term.
“Taking everything together today’s announcement was really as much as we could expect and hope for. At the margin it will help support growth and inflation but probably does not make a meaningful difference,” he argued. 
“Looking ahead, we think the ECB from here on can tinker on the edges but probably can’t meaningfully change the policy mix. For all intents and purposes it has shot its last big bullet.”
Neil Williams (pictured), group chief economist at Hermes Investment Management, says the announcement wasn’t as surprising as market behaviour would suggest and agrees that the ECB cannot continually jump to the rescue.
“By ‘pushing out the boat on QE2’ a little further, cutting rates again, and setting up from June new longer-term refinancing operations for banks, the ECB probably offered as much as it could today from its emptying policy ‘tool-box’,” he said.
“Eurozone GDP may be back to its pre-crisis level, but with headline inflation still a world away from its 2 per cent target, the damp squib of December’s QE extension, and the euro’s ascent since, Mr Draghi was always going to act today – on his first anniversary of QE.”
