ECB interest rate to ‘stay low for decade’, says Merrion Capital economist

A leading economist recommends investors should buy the bond debt of the so-called eurozone peripheral nations, such as Portugal, Spain and Italy, as market participants predict that ECB rates could stay at ultra-low levels for a decade.

Alan McQuaid, chief economist at Merrion Capital, said that “awash with cheap cash” from the ECB, big companies across the eurozone, and including semi-state companies here, “may soon get the same free ride their governments have taken in recent years: Investors paying for the chance to lend to them.”

“The ECB’s plan to buy corporate bonds under its quantitative easing scheme could depress borrowing costs already at record lows and see some companies sell debt at negative yields,” he said.

Mr McQuaid said that while such deals “may remain rare” that “more than a dozen euroland companies have already seen yields on existing bonds fall below zero”.

The ECB on Thursday reiterated that it was committed to sticking to its €80 billion a month bond-buying programme, as it seeks to boost eurozone inflation closer to its 2%.

The bond-buying programme — known as quantitative easing — includes purchases of sovereign bond debt, including that of Ireland’s, as well as some corporate debt issues.

Mr McQuaid pointed out that the ECB appears to be years away from hitting its inflation target — which implies that rates across the eurozone would be kept lower for much longer — perhaps for as long as the next 10 years.

“The market is currently priced for the ECB to be the new Bank of Japan and keep rates anchored near zero for a decade,” Mr McQuaid said, but added that the outlook could change swiftly if markets assess in the next six months that the ECB is pushing up inflation at a swift pace after all.

There was no sign of that in the latest survey of eurozone activity published yesterday, however. Markit’s Composite Flash Purchasing Managers’ Index, based on surveys of thousands of companies and seen as a good guide to growth, dipped to 53 from March’s 53.1, matching a 13-month low in February.

Mr McQuaid said that despite many Germans believing that the eurozone crisis was back, he still recommended buying sovereign debt of peripheral countries, including that of Spain, Portugal and Italy.