The European Central Bank’s decision to further cut interest rates in an effort to stave off deflation have been met with mixed reactions by money managers.
Mario Draghi, president of the ECB, announced Thursdaythat its benchmark interest rate will be cut to 0.15%, from 0.25%, and also the rate on bank deposits held overnight with the central bank will be cut to -0.1%, down from zero. Commercial banks will be charged for keeping money at the Frankfurt-based bank.
When it comes to pension funds, the rate cut will put pressure on plans without interest rate hedges.
“The ECB’s rate cut today, and its setting of negative rates for banks depositing with it, is a reminder to pension funds that even with historically low interest rates, they can still fall further,” said Danny Vassiliades, head of Punter Southall Investment Consulting, in a statement. “Any assumption that interest rates could only go up from here may need to be revised if deflation takes hold. This may again lead to increases in the value placed on pension scheme liabilities for schemes without interest rate hedging in place.”
“These measures represent a significant easing of policy, bold moves designed to take the market by surprise,” said Luca Paolini, chief strategist at Pictet Asset Management, in a statement. “The combination of negative deposit rates and the non-sterilization of bond purchases should further weaken the euro in the medium term, which is key to ending deflation. However, the currency would be much more responsive to full-blown quantitative easing. In this respect, we draw some comfort from the fact that (Mr. Draghi) clearly left the door open to QE, even if he did not specify the conditions under which it would be undertaken.”
Mr. Paolini said prior to any quantitative easing, the ECB would require a “substantial cut in (its) inflation forecast for 2015, which is currently 1.5%.”
The announcement kept investors bearish. “While we remain positive overall on the European periphery, we are cautious in the current environment and our positions in the region are now at their lowest levels in over two years,” said Scott Thiel, deputy chief investment officer of fundamental fixed income and head of the global fundamental fixed income team at BlackRock, in a news release.
BlackRock is also “cautious” toward the global bond market. “We see the potential for volatility and liquidity issues to arise once markets begin to focus on the large imbalances that have occurred from rates being so low for such a very long time, particularly by the Fed and the Bank of England,” Mr. Thiel said.
