ECB can still surprise but the effectiveness of QE is dwindling

March 14, 2016

European Central Bank ECB

The big news in financial markets last week was the European Central Bank (ECB) announcement on Thursday. The announcement included an expansion of the current stimulus, increasing the pace of quantitative easing, lowering the main interest rate to 0% and cutting the bank deposit rate to minus 0.4%. These measures provided a sharp positive shock for markets around the world. Unfortunately, the initial elation was short lived as the ECB president Mario Draghi stated at a news conference that there would likely not be any further reduction in rates. However, by the close on Friday, investors appear to be broadly positive on the measures announced and the forward guidance given, with stocks having a strong finish to the week.

The build-up to the next UK budget, on Wednesday, gathered pace last week and over the weekend. It is expected that economic forecasts will be revised down, giving the chancellor less room to manoeuvre if he is to meet his self-imposed deficit reduction plans. After a more favourable situation in the Autumn statement, there are likely to be harsher cuts to government spending. It is also expected that there will be strong warnings about the state of the global economy and the risks of leaving the EU.

As each round of monetary easing becomes less effective than the last, the burden of supporting economic growth may soon come to rest on national governments rather than central banks. After years of increasing austerity in most developed nations, there are growing calls to have a global united fiscal expansion. Notably, spending on productivity-enhancing projects, such as infrastructure and research and development should be at the top of the list. However, with many governments having significant debt to GDP ratios already, and the political difficulty of a unified effort, it may be some time before the tide of government spending turns.

Index Open Close Change % Change
FTSE 100 6199 6139 -60 -0.97%
S&P 500 2000 2022 22 1.10%
Dax 9824 9831 7 0.07%
Cac 40 4456 4492 36 0.81%
Nikkei 225 17014 16938 -76 -0.45%
UK 10 Year Gilt Yield 1.464 1.554 0.09 6.15%

Over the coming week, there will be interest rate announcements from the Bank of England and the Federal Reserve.

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