Persistently low inflation in Europe has prompted Mario Draghi, president of the European Central Bank (ECB), to pledge an “ample degree of monetary accommodation”. Expect interest rates to fall further into negative territory and a new round of asset purchases in the fourth quarter, say Daniele Antonucci and Joao Almeida of Morgan Stanley.
The ECB has already purchased more than €2trn in government bonds with printed money. Yet with European bond yields hitting record lows and the supply of German bunds drying up, some are proposing bolder measures. Larry Fink, the chief executive of asset manager BlackRock, has called on the ECB to buy European stocks with newly created cash.
Injecting money into the system in this way has been tried before: the Bank of Japan now owns 75% of the country’s exchange-traded fund market. But as Seema Shah of Principal Global Investors told City AM, a practical objection is that few European savers own stocks directly, so any stockmarket boom – and the resulting “wealth effect” – is unlikely to inspire higher consumer spending.
The main problem, however, is that such measures just prolong and exacerbate central bank interference in markets, which in the past decade has artificially inflated prices and led to the prospect of a nastier crash down the road when the stimulus is finally removed – or investors lose faith in it.
Read more on this on Merryn’s blog, here: BlackRock is wrong: nationalising capitalism is a bad idea