Last week, the European Central Bank (ECB) increased monetary stimulus. The continued stimulus was widely expected, but the amount exceeded expectations. The most recent stimulus involved four components.
- The main refinancing rate was reduced by five basis points (bps) to 0% and its marginal lending rate to 0.25%.
- The deposit rate was reduced from negative 0.30% to negative 0.40%.
- Monthly asset purchases will increase by 20 Billion euros to 60 billion euros. The total program is now 1.7 billion and includes investment-grade non-financial corporates.
- Additional special loans with a four year maturity to spur bank lending were offered with a rate of 0% to negative 0.40%.
The additional stimulus came with guidance that the ECB expects low inflation for a prolonged period of time.
The Fed meets this week, and I don't expect them to increase interest rates until June at the earliest. I do anticipate they will cite improving economic conditions, with inflation still remaining below the 2% target.
Risk markets have performed extremely well over the last three weeks. Equity markets, high yield bonds and energy prices have risen substantially in price. I expect this rally will slow as valuations have adjusted very quickly, approaching fair value and key technical resistance levels.
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