Euro billions rollover

Draghi cuts interest rates and unveils a beefed-up version of his QE programme, but measures fall short of market expectations says Ben Brettell, Senior Economist, Hargreaves Lansdown.

It’s six weeks since ECB chief Mario Draghi dropped a strong hint that more stimulus measures could be on the way. Since then European stock markets have climbed steadily in anticipation of an early Christmas present from the central bank. This week’s CPI figure, showing inflation at just 0.1 percent across the single currency bloc, added further weight to the case for immediate action. However, judging by the market reaction, Draghi appears to have over-promised and under-delivered.

Markets expected Draghi to deliver a combination of rate cuts and tweaks to the ECB’s QE programme. The deposit rate for commercial banks was already in negative territory at -0.2 percent and analysts had predicted a cut of between 0.1 and 0.2 percentage points. The cut to -0.3 percent therefore left markets somewhat underwhelmed. The other two key interest rates were left unchanged.

Far more exciting for the markets were the expected tweaks to QE in the subsequent press conference. The current programme of €60 billion of asset purchases per month has been extended by six months, to March 2017 (or beyond if necessary). ECB has also expanded the range of assets being purchased, to include regional and local government debt.

However, this does little to provide an immediate boost to the economy. Markets had been hoping for an acceleration of QE, i.e. an increase to the €60 billion monthly figure. The disappointment in financial markets is palpable this afternoon. The euro has strengthened (which won’t help the euro zone economy) and stock markets have fallen on the announcements.

Draghi concluded by asking governments to adopt more growth-friendly fiscal policies – a recognition that monetary policy alone might not be sufficient to get the euro zone out of the mire. However, given the already huge levels of government debt it is difficult to see where any significant fiscal stimulus could come from. The road to recovery in Europe remains long, bumpy and sharply uphill.

Created on: 16-Dec-15 12:01

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