AMP Capital head of investment strategy and chief economist Shane Oliver said while business conditions are recovering and budget deficits are declining among the main crisis countries, growth remains gradual at just 0.9 per cent in the 12 months to the March quarter.
“Unemployment has only fallen slightly from its peak of 12 per cent to 11.7 per cent, inflation is just 0.5 per cent year on year, money supply is growing at just 0.8 per cent and bank lending contracted 1.8 per cent over the year to April,” said Mr Oliver.
He said in order to reduce the risk of low growth and deflation, the European Central Bank (ECB) is introducing another round of monetary stimulus, which includes cutting its interest rate to 0.15 per cent and cutting the rate of interest banks receive on excess deposits at the ECB to -0.10 per cent.
It will also extend guidance on how long rates are to remain low, commit to supplying unlimited short-term funds to banks at the 0.15 per cent interest rate and a new long-term lending program to banks, end the sterilisation of bonds held in its existing bond buying program and prepare a program for purchasing asset backed securities, said Mr Oliver.
He said the latest ECB reforms were, however, “not as momentous as its efforts in 2011 and 2012 that ended the eurozone crisis”.
“It would also have been better to see a US-style quantitative easing program straight away, and there are doubts about how successful each of the measures announced by the ECB will individually be,” said Mr Oliver.
Despite this, he said this ECB’s “broad-based approach” of implementing everything at once adds confidence that the “whole should be worth more than the sum of the parts in terms of its impact on the economy”.
Mr Oliver said the “easier monetary environment in Europe is positive for eurozone equities, which remain relatively cheap”.
He said eurozone shares have already seen a 2.3 per cent rally following the announcement.
He also said ECB actions will likely generate downward pressure on peripheral country bond yields and support global carry trade that involves borrowing cheaply in low-yield countries and putting the proceeds into higher-yielding countries and assets.
