The European Central Bank will take further measures to support a weak economy and anemic lending environment, leading fund managers told Citywire Global after Draghi's rate cut announcement on Thursday.
In its first rate cut since July of last year, the ECB cut rates to a record 0.5%, a widely expected move following a string of disappointing economic data for the region.
'With inflation falling and growth in core Europe weaker, it seems very possible that further rate cuts and monetary stimulus may be announced by the ECB in the month ahead,' Bluebay's co-head of fixed income, Mark Dowding, told Citywire Global.
As well as cutting interest rates, ECB president Mario Draghi said the central bank would conduct its main refinancing operations (MROs) as fixed-rate tender procedures with full allotment until at least July 2014. This measure would represent liquidity insurance for the banking system, Draghi said.
'With the extension of the MRO programme, the ECB has taken a much clearer step to giving that forward guidance, and this will keep Eonia – and the front end, by extension - in a tightly defined range,' Alex Johnson, fixed income manager at FFTW, a subsidiary of BNP Paribas, told Citywire Global.
'While no one is predicting a tightening in Europe given the poor macroeconomic data, the object of forward guidance is to increase certainty,' he said.
ECB is 'not out of bullets'
In the press conference, Draghi said the central bank was considering cutting deposit rates.
This apparent change in tack was far more significant that the actual rate cut announced yesterday, said Andy Mulliner, co-manager on the Henderson Total Return Bond Fund, alongside Citywire A-rated Phil Apel.
'It’s hard to have a feel for the impact of a negative deposit rate on the real economy but it does signal that the ECB is not out of bullets yet, which was something that market participants have been worried about.'
'It should help avoid a situation where the Euro steadily appreciates against all other currencies by virtue of a hamstrung central bank being continually outeased,' Mulliner said.
Responding to a question on whether the ECB is the last pillar supporting austerity measures, Draghi said the central bank's monetary policy has been 'extraordinarily accommodative all throughout' and pointed to the rally in markets since its OMT announcement last year.
Howver, Kevin Gardiner, Barclays Wealth & Investment Management CIO for Europe, remained cautious on what the central bank could do to stimulate the economy.
'We would be much happier if people were buying riskier assets in order to get exposure to growth. Until now, markets have stabilised on the expectation that the central banks will support economies.'
'We would only expect a change when the ECB normalises interest rates - and we don't expect this any time soon.'