Sandra Holdsworth, fixed income manager at Kames Capital said:
“Today, after a six week Christmas break, the ECB met in Frankfurt to discuss monetary policy in the eurozone. Interest rates were left unchanged, with the main announcement the extension of its programme of asset purchases to finally include government debt.
The policy remains very controversial in the eurozone because of its unique structure, being a monetary but not a federal or fiscal union.
However, President Mario Draghi and the governing council took the decision to expand the ECB’s balance sheet in the same way the US Federal Reserve, Bank of England and Bank of Japan have all done since the financial crisis.
This has long been seen as the only appropriate monetary policy option for the eurozone despite the objections from some countries within the union. Fears remain that some countries will bear losses from other countries’ debts were they to default or restructure their national debt, and some believe that the policy will give the green light to fiscal irresponsibility.
To allay these fears only 20% of the risk associated with these purchases will be shared. The remaining 80% will be held at a national level, but the policy is likely to remain controversial for some time to come.
In technical terms the ECB plans to increase their asset purchases from approximately €10bn per month to €60bn, purchasing sovereign bonds, bonds issued by government agencies, and those from European institutions until at least the latter part of 2016, or for longer if it is required.
This will take the size of the ECB’s balance sheet up to around €3trn, but this policy is expected to benefit the eurozone by keeping interest rates low across all maturities of the yield curve, encouraging holders of bonds to look for higher returns in other asset classes or in the real economy.
It should also engender confidence that the ECB is responding to current levels of low inflation, while likely weaken the value of the euro which would benefit the eurozone by making exports more competitive.
The ECB has excluded bonds issued from some governments within Europe, with a requirement that securities have to be of a minimum investment grade. Countries under an EU/IMF adjustment programme will also be excluded, which means at present Greek government bonds are not eligible for inclusion.
In theory this could change in the future, although only if Greece completes the current EU/IMF programme with a positive result and is granted an exemption with regard to its credit rating.”