Legg Mason Western Asset reacts to ECB’s quantitative easing announcement

Andrew Belshaw, Head of Investment at Legg Mason subsidiary Western Asset said: “Despite the negative impact on the Eurozone’s near term inflation outlook from the tumbling oil price, in our opinion, data has not been weak enough to move the ECB away from its ‘wait and see’ stance until now. Acting now could turn out to be problematic because of the proximity of the Greek elections.
“Nonetheless, with the market pricing in QE, President Draghi’s hand has effectively been forced. Given the market fallout when Draghi has previously disappointed (back in October 2014) the pressure was on the ECB to do something, and they have delivered, and markets are reacting positively as a result. While the headline figure is €60bn, this includes the existing ABS and Covered Bond program. The reality is the additional sovereign purchases announced today will be of circa €50bn. The fact President Draghi emphasised they would continue until a sustained adjustment in the path of inflation is seen, is clearly positive for the market. The fact inflation linked securities are also included in the purchase program is also positive, reinforcing the ECB’s determination to increase inflation expectations.
“However, in our opinion, QE is ultimately not the solution to resolve the dual issues of weak growth and fragility which plague the Eurozone. Instead, the ECB should be more radical via its policy operation, perhaps by using its own balance sheet as a backstop to corporate lending. QE is but one stage on the road to that conclusion, and we expect to see further accommodative policy at some point.”