Yesterday at precisely 1.45pm most market fanatics were surely stuck to their screens, awaiting the much awaited decision by the European Central Bank (ECB).

Investors were hoping that this time round, Super Mario would not delude following December’s decision which had dragged markets considerably lower. And no this time round, he didn’t, the ECB eased further its monetary policy with the bond buying program exceeding an average median estimate of an increase to Euro 75bn from the previously Euro 60bn.

Undoubtedly, yesterday’s ECB easing triggered some sort of short-term comfort within equity markets which spiked following the announcement following the better than expected easing. In fact, the two most remarkable surprises, in my view, were the increased bond buying purchases program from €60bn to €80bn on a monthly basis.

In addition, the other surprising factor was the inclusion of Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area, in the list of eligible assets for regular purchases. The former exceeded market expectations by €5bn, while the latter was softly mentioned in the pre-announcement expectations.

In addition, in line with market expectations the interest rate on the deposit facility was decreased by 10bps to -0.40 per cent, with effect from 16 March 2016, while the interest rate on the marginal lending facility will be decreased by 5 bps to 0.25per cent.

Furthermore, on the main refinancing operations this was decreased by 5bps to 0.00per cent, while a new series of four targeted longer-term refinancing operations, each with a maturity of four years, will be launched.

The interesting bit is how markets reacted to the aforementioned news. Initially, the Euro Stoxx 50 spiked to just below 3 per cent, while yields on sovereign and investment grade bonds declined. However, markets than retreated from their intra-day highs.

Economic growth for 2016 was revised lower from 1.7 per cent to 1.4 per cent, while inflation forecasts were slashed from 1 per cent to 0.1 per cent. One surprising comment by Draghi was that the Governing Council does not anticipate more rate cuts based on the current market view.

This comment, seemed to have triggered a sell-off as investors digested negatively the fact that possibly further easing in terms of rate cuts might be limited. This pushed the euro higher and equities lower.

Let’s face it. The increased monetary stimulus is a clear signal that till-date the economic recovery has deviated notably from the ECB’s projections. That said, an encouraging element is the fact that the current low levels in the price of oil should shed some light at the end of the tunnel, through further disposable income. However this will surely not be the turning point. Currently markets need to be convinced with a brighter roadmap towards recovery to regain confidence.

My view is that despite monetary stimulus is one of the main tools in stimulating economic growth, when the economic situation gets harsher, this time round we need more than solely monetary stimulus. My perception is that Governments should start off thinking on how to adopt a strategy that aligns the interests of monetary politicians.

That said, in my opinion, unfortunately the populism factor prevails. Politicians do not want to fall out with those who elected them through the implementation of austerity measures, other than those imposed from the European Commission, and this is surely one of the main factors of the lagging progress towards recovery. So the question which should be posed, ‘is it time to implement a fiscal union?

This article was issued by Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.  

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