The European Central Bank sought to revive Europe's sagging economy by unleashing a wave of money-creation, or quantitative easing. Will it work? This is what wealth managers had to say.

It is proving to be a lively January in the financial markets.

The European Central Bank yesterday sought to revive the eurozone’s flagging economy by announcing it will add billions of freshly created money into the system through quantitative easing, a move that drew general applause – with some heavy caveats – from economists, asset and wealth managers.

The central bank will buy government bonds, starting from March this year through to the end of September. The QE programme equates to putting €60 billion euros a month into the economy. In total, that would represent a colossal injection of fresh money of over €1 trillion once the process is complete.

With eurozone GDP sagging, the ECB has been under pressure for some time to fire the bullet of QE, although this is controversial given concerns about very different economic conditions in countries, such as between the northern and southern parts of the currency bloc.

The decision came exactly one week after the Swiss National Bank stunned forex markets with its decision to lift the peg on the Swiss franc at a rate of 1.20 – that peg had been in place since September 2011, when it was feared the eurozone might break up. The surge in the Swiss franc has sent shockwaves through financial markets.

Here is a collection of reactions to what the ECB did yesterday:

Yves Kuhn, chief investment officer at Banque Internationale à Luxembourg.
“This news was not taken positively by everyone, with many critics stemming from Germany. By reducing long-term rates (the programme will focus on maturities of two to 30 years) any asset pricing will come down in the eurozone. Putting that liquidity into ECB deposits which have a negative yield will not help anyone. Subsequently, banks will be remunerated now to provide more credits as they will be flushed with liquidity. Some funds will flow into shares, and we could see a further appreciation of eurozone risk assets.
 
“Fundamentally, structural reforms are still necessary, and all that the ECB provided today is some more time for this to happen. It is pretty clear that competitiveness in the long term will not be gained by weak currencies. The risk sharing issue is not fundamental for the effectiveness of the programme; the ECB council agreed on 20 per cent.”

Canaccord Genuity Wealth Management’s CIO, Nigel Cuming.
"In line with our expectations the ECB surprised on the upside today, announcing that it would embark on a €1.08 trillion quantitative easing package in March as opposed to the originally anticipated €500 billion. This puts the ECB’s programme close in size to the initial QE programme embarked upon by the Fed and the Bank of England back in 2008 in terms of GDP.

“We do not, however, consider this to be the most important factor at play here and remain cautious about the likely effectiveness of QE within the eurozone. What was key today was how the risk that accompanied this programme would be shared amongst the euro nations. Would the risk be spread collectively across the eurozone? Or would each country’s national bank be responsible for their own bonds? Whilst president Mario Draghi announced that the ECB will assume most of the responsibility for any losses that occur through either default or through the restructuring of national debt, 20 per cent of the assets will be bought by national central banks.”

Salman Ahmed, global strategist at Lombard Odier Investment Managers.
“Support for European fixed income (both sovereigns and corporates) looks likely to remain intact after the announcement of the program. Interest rates will have to remain low or go lower in order to provide the necessary stimulus to the economy. Given structural issues and faulty transmission channels, we think the ECB will have to continue with asset purchases for the foreseeable future particularly as deflation is likely to worsen in coming months to keep pressure on rates and FX intact.”

Johannes Müller, CIO wealth management for Germany at Deutsche Asset and Wealth Management.
"Today’s European Central Bank’s decision came at the upper end of expectations that were reflected in financial market prices. Nevertheless, we believe that, after some initial excitement, a degree of calm should replace the rampant speculation of recent days and weeks.

"From an economic perspective, we take the view that the ECB's sovereign bond purchases will be neither a cure-all nor a destructive force. Their most lasting positive effect on the economy is likely to come from the devaluation of the euro, which amounts to a small stimulus programme. In any case, the overall impact of QE is likely to be limited.

"We are much more disturbed by the nature of the discussions that took place in the run-up to the ECB's announcement – which included senior politicians making de facto announcements, as if they were already fact, about decisions that the independent central bank had not yet taken.

"There may be a temporary setback for the euro, but we expect the currency to continue depreciating against the US dollar. This will support corporate profits in the Eurozone and consequently will be positive for equity markets. Falling bond yields have been driven primarily by declining rates of inflation and inflation expectations, as well as speculation about ECB policy. As we do not expect inflation trends to reverse any time soon, we believe that returns from bond markets should continue to trade friendly in the short term."

Azad Zangana, senior European economist and strategist at Schroders.
“Overall, we think the ECB’s QE programme will benefit the eurozone economy by reducing the risk of deflation; however, it is not a panacea for the monetary union’s ills. Deep structural reforms are required in order to raise Europe’s potential trend growth. Without structural reforms, the ECB may be forced to add additional stimulus in the future as growth falters again.”  

Jon Mawby, portfolio manager at GLG and co-manager of the £1 billion GLG Strategic Bond Fund.
“Market participants have taken the ECB’s €60 billion-per-month programme positively given that there is partial loss-sharing and that more importantly it will continue until it sees a 'sustained adjustment' in the path of inflation, which is consistent with our aim of achieving inflation rates below, but close to, 2 per cent.

“This means the programme is potentially open ended in nature and given that asset purchases have been guided in the two-to-30 year maturity spectrum, it should be supportive of peripheral government yields in the medium term. However, for the recovery to be sustained we will need to see continued structural reforms. In the short term there remains a key tail risk from the Greek elections over the weekend, particularly in light of the ECB’s inability to buy Greek debt until the SMP rolls off in July.”