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The ECB has set the date to stop its programme of quantitative easing. Is the region ready for such a big reversal?  
Thursday 21 Jun 2018 Author: David Stevenson

The European Central Bank (ECB) has finally called time on its programme of quantitative easing as it takes steps to tighten its monetary policy.

The central bank will halve its bond purchases to €15bn a month from September and stop completely by the end of the year.

The programme was started in 2015 partly to boost inflation and also to increase growth in the region. Nations such as Germany have grown uncomfortable with the amount of assets held by the ECB, said to be around €2.4tn at time of writing.

The markets have not panicked, probably as a result of the ECB’s pledge not to increase interest rates until the middle of next year at the earliest. Across Europe, markets took the news in their stride; the FTSE 100 gained 0.8% on 14 June, Germany’s DAX improved by 1.8% and France’s CAC rose 1.6%.

One reason for the boost to European indices is the euro sell-off following the announcement. This made European equities cheap and thus desirable.

In terms of UK-listed investment trusts with European exposure, it’s a mixed bag. For example, Jupiter European Opportunities Trust (JEO) has made gains since the decision whereas shares in Fidelity European Values (FEV) have slipped.

Edward Park, investment director at Brooks Macdonald, says zombie companies which may struggle to pay their debts have been allowed to survive as the bond yields have been so low during the period of quantitative easing.

‘This is not a problem when central banks are keeping bond yields artificially low, as it is cheap and easy to refinance debt, and zombie companies can therefore continue to meet their financial obligations,’ says Park.

However, when monetary policy becomes less accommodative, problems will arise for heavily indebted companies and countries.

Italy is one example of a country that is in a perilous debt situation and will find it harder to meet its debt obligations. It has also just voted in a populist party, the Five Star Movement, which may not be willing to obey the EC’s rules.

Some commentators are worried about the lack of an interest rate hike despite the markets seeing it as a positive. Nick Peters, multi asset portfolio manager at Fidelity, says the markets’ knee-jerk response was to sell the euro.

‘Not only does the Eurozone have to contend with an economy that has peaked and is underperforming the US, medium-term geopolitical concerns, and higher oil prices – now it may not see positive interest rates before the next global downturn, and enter that downturn with very little ammunition,’ he adds. (DS)

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