![\"graphique_1_-_eurozone_-_expected_inflation_rate_over_5_years_starting_in_5_years.jpg\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2015\/02\/graphique_1_-_eurozone_-_expected_inflation_rate_over_5_years_starting_in_5_years.jpg\")
<\/p>\nDespite the exceptional measures introduced in 2014 (negative deposit rate,
\nsubsidised loans for banks in the shape of TLTRO, purchases of covered bonds and
\nasset-backed securities), the ECB failed to raise medium-term inflation
\nexpectations (see Chart 1). In the 12 months to December inflation fell to -0.2%,
\nthanks to the impact of oil-related deflation. Strong action was therefore
\nimperative to avoid a knock-on effect for wages and prices. <\/p>\n
<\/p>\n
On 22 January, the ECB unveiled an asset purchase programme significantly
\nabove expectations. Monthly purchases have been extended to include sovereign
\nsecurities reaching a level of \u20ac60 billion per month. But it is the length of the
\nECB\u2019s programme which is extremely ambitious: it is planned to last for at least
\n18 months (up until September 2016), representing a minimum of close to 11%
\nof GDP, and until such time as the ECB considers that inflation is credibly on track
\nto meet its 2% target. By outlining a dual constraint for the length of the
\nprogramme, based on both a set time period and other more vague criteria, Mario
\nDraghi has given himself a great deal of leeway on this issue. In addition, the ECB
\nwill purchase sovereign bonds with maturities of up to 30 years, including those
\nwith negative yields. At the same time, the interest rate on TLTRO loans for banks
\nhas been reduced by 10 basis points.<\/p>\n
The impact on sovereign debt markets should be colossal, provoking a new fall in
\nrates for all maturities, including peripheral debt (with the exception of Greece,
\nwhich is today excluded from the programme). We should see a new flattening of
\nsovereign yield curves across the board. However, falling rates are not a sure sign
\nof immediate victory for the ECB: one element in the fall in rates is a fall in longterm
\ninflation expectations, as shown by the reaction of the inflation swap
\nmarkets. The fall in expected inflation is consistent with a halt to euro
\ndepreciation: the currency plummeted in value in anticipation of the 22 January
\nannouncements (see Chart 2). So it is still too early to claim victory, but Mario
\nDraghi has nevertheless succeeded in gaining substantial leeway in the fight
\nagainst deflation, despite the reticence of some eurozone governments.<\/p>\n
![\"graphique_2_-_eurozone_-_euro_versus_dollar_exchange_rate.jpg\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2015\/02\/graphique_2_-_eurozone_-_euro_versus_dollar_exchange_rate.jpg\")
<\/p>\n
These ECB decisions provide comfort for our multi-asset portfolio positions: we
\nprefer bonds versus liquidity, and European equities versus the rest of the world.
\nTaking account of the potential for a pause in euro depreciation, we prefer to play
\nan overexposure to European equities via small caps rather than large caps, as
\nthey will benefit from the fall in real rates and easier access to credit thanks to
\nthe TLTRO.<\/p>\n
![\"graphique_3_-_equity_indices_-_us_versus_eurozone.jpg\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2015\/02\/graphique_3_-_equity_indices_-_us_versus_eurozone.jpg\")
<\/a>\n\t\t\t<\/div><\/figure>