European Central Bank president Mario Draghi has disappointed market analysts after he failed to specify how much support he would provide the European economy through his bond buying scheme.
Mr Draghi announced today more details about his bond buying programme which will involve the purchase of covered bonds - effectively a group of loans - and asset backed securities, which are pooled loans put together by banks and sold on the secondary market.
The central bank said it would buy these securities in a bid to support the flagging eurozone economy as inflation data continues to disappoint and economies including Germany have shown recent weakness.
Azad Zangana, European economist at Schroders, said Mr Draghi had “disappointed” investors by not confirming the size of purchases.
“Investors had hoped that the ECB would step-up stimulus plans after the recent weakness in both growth and inflation data, either by announcing a very large amount of purchases, or the addition of sovereign debt purchases,” Mr Zangana said.
“However, Mr Draghi merely confirmed previously announced measures, but without revealing the scale of the programme.”
Mr Zangana said Mr Draghi had previously signalled he would like the ECB’s balance sheet to return to the peak seen in 2012, which would imply an additional €1.1trn (£862bn).
“However, he played down the notion of returning to past peaks – a sign that the governing council either did not support the notion, or that it understands that it may not be possible.”
The economist added the ECB had a problem in that the pool of assets it was targeting would not make a major impact on the economy.
“The available stock of asset backed securities is approximately €250bn while the available stock of covered bonds is approximately €650bn,” he said.
“However, these figures also include sub-standard issuance, which the ECB has ruled out buying.
“We believe the ECB is aware of this problem, which is why it has not set a purchase target. As a result, European equities and bonds are trading lower (in price), while the euro as appreciated slightly.”
Kames Capital fixed income manager Sandra Holdsworth agreed the ECB was “vague” on the total size of the programme.
“This is more likely to be a reflection of the complexity of the policy rather than a deliberate ploy,” she said.
“Mr Draghi stressed the ECB’s balance sheet would increase in size towards that pertaining at the beginning of 2012. In the first quarter of 2012 the balance sheet which varied between around €2.7trn to €3.1trn.
“By increasing the size of the balance sheet and by stressing the difference in policy cycles around the globe in the accompanying statement to the policy decision, the ECB Governing Council is giving very strong signals that a weaker euro is preferable.”
Ms Holdsworth added the European Council had again rejected the purchase of government bonds - which would be considered conventional quantitative easing.
Robin Marshall, adviser of Smith & Williamson’s Global Government Bond fund said Mr Draghi resembled Oliver Twist in that “the market looked at what [he] served up at the press conference and have concluded they need to see more”.
“The ECB continues to repeat the mistakes made by the Bank of Japan in dealing with outright deflation risk, by denying the scale of the risks and not embarking upon active balance sheet expansion to pre-empt them,” he said.
“The recent poor take-up of cheap ECB liquidity available through the [targeted loans programme - roughly €82bn out of a maximum €400bn - reflects weak loan demand and is precisely the kind of liquidity trap [John Maynadrd] Keynes described in the 1930s; arguing fiscal stimulus was required to offset the impact of the trap in rendering monetary policy ineffective.”
