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Fresh Stimulus from the ECB

European equity markets generally rose during March, although investor sentiment was negatively affected by terrorist atrocities in Brussels. The Dax Index rose by 5% in March, while the CAC 40 Index increased by a rather more muted 0.7%. Meanwhile, over the first quarter, the Dax Index fell by 7.2% while the CAC 40 Index dropped by 5.4%.

The European Central Bank (ECB) expanded its monthly quantitative easing programme from €60 billion to €80 billion and enlarged its bond-buying programme to include debt issued by the corporate sector. The ECB also cut its principal interest rate from 0.05% to 0% and its bank deposit rate from -0.3% to -0.4%. Share prices initially rose on the announcement, but subsequently fell back, ending the day firmly in negative territory. Meanwhile, despite the ECB’s decision, the euro rose to its highest level against the US dollar since October 2015 during March.

During the month, the International Monetary Fund warned, “The downside risks (to global growth) are clearly much more pronounced than before” and highlighted the ongoing threats created by “unresolved legacies”. In Europe, these legacies include highly leveraged sovereign and private-sector balance sheets and non-performing bank loans.
The ECB reduced its forecasts for inflation in the euro area. According to ECB President Mario Draghi, the cuts were triggered by weakness in the price of oil. The rate of inflation is now predicted to reach only 0.1% this year, compared with earlier forecasts of 1%, and is subsequently expected to climb to 1.3% next year and 1.6% in 2018. Although Mr Draghi was at pains to emphasise that the eurozone was not in deflation, he warned that risks to growth in the eurozone were “tilted to the downside”.

Inflation in the eurozone remained in negative territory during March, weighed down by heavy falls in energy prices. The region’s annualised rate of inflation picked up slightly, rising to -0.1% over the month; however, ECB policymakers are likely to remain under pressure to take further action to support the economy.

The rate of unemployment in the eurozone fell from 10.4% in December to 10.3% in January, reaching its lowest level since August 2011. At individual country level, Germany and the Czech Republic posted the lowest unemployment rates of 4.3% and 4.5% respectively. In comparison, the rate of unemployment in both Spain and Greece remained above 20%.

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