* FTSEurofirst 300 up 1.6 pct to seven-year high; DAX at record
* ECB to pump 60 billion euros a month into economy
* Euro zone banks, carmakers among top gainers
* Sharp drop in euro should help to fuel earnings recovery
By Blaise Robinson
PARIS, Jan 22 (Reuters) - European stocks rallied on Thursday, with one index closing at a seven-year high, after the European Central Bank announced it would begin buying government bonds in a bid to revive the region’s economy and stave off deflation.
Banks and automakers were among the best performers, since they would benefit from cheap borrowing rates and a weaker euro.
Raiffeisen Bank International rose 6.7 percent and Credit Agricole 3.4 percent. PSA Peugeot Citroen gained 4.9 percent and Renault 3.8 percent.
“More favourable sentiment on the euro outlook should support cyclical sectors such as automobiles and banks,” Roland Kaloyan, the head of European equity strategy at Societe Generale, wrote in a note. “Banks in particular should benefit from a rebound in corporate lending.”
The FTSEurofirst 300 index of top European shares ended 1.6 percent higher at 1,453.37 points, its highest close since early 2008. The benchmark index has surged 6.2 percent so far this year, outperforming Wall Street, where the S&P 500 is down 0.6 percent in 2015.
Europe’s outperformance over the United States is expected to continue in 2015. European equities are ripe for a catch-up rally after years of underperformance.
Southern European stocks also featured among the top gainers on Thursday, with both Italy’s MIB index and Portugal’s PSI 20 index rising 2.4 percent. The two indexes are up 7.7 percent and 9.9 percent respectively in 2015.
Germany’s DAX rose 1.3 percent on Thursday, after reaching a record high during the session.
The gains came after ECB President Mario Draghi said the central bank would embark on quantitative easing -- printing money to buy government bonds. Together with existing schemes, the programme will pump 60 billion euros a month into the euro zone economy from this March until at least September next year.
“The size of the programme comes at the high end of what the market had been expecting, so it’s quite a positive surprise,” said Jeanne Asseraf-Bitton, head of global cross-asset research at Lyxor Asset Management. “Now, all eyes will be on the euro zone inflation expectations. That’s where we’ll see if the programme is a success or not.”
The euro fell to an 11-year low against the dollar following the announcement, reaching $1.1408 after rising to $1.40 in May. A weak euro should boost European corporate earnings this year, particularly for exporters. Strategists say a 10 percent fall by the euro translates into a 6 to 8 percent rise in earnings for euro zone companies.
But despite the market enthusiasm over the ECB plan, some fund managers and analysts doubt it will succeed.
“I still believe that this will have little real impact on the euro zone economy as government bond yields are already at rock-bottom and investment-grade corporate bond yields in Europe are on average 1 percent or below,” said Edmund Shing, global equity fund manager at BCS Asset Management.
“Automakers should benefit and certain aerospace companies like Safran and Zodiac are obvious beneficiaries, too. However, the real question is whether lending to euro zone small- and medium-sized companies will take off in the next six months, given that we have QE and given that the ECB’s bank capital adequacy tests are now passed.”
Today’s European research round-up (Additional reporting by Atul Prakash and Francesco Canepa in London; Editing by Larry King)