In January this year the European Central Bank made a decision to launch an expanded asset purchase program in March with monthly purchases of mainly government bonds worth 60 billion euros.
Advertisement
US and European markets sank on Thursday after the European Central Bank announced stimulus plans that were less aggressive than investors were expecting.
But he took issue with skeptics who doubt the ECB’s actions have had a sizeable effect, noting that inflation would be 0.5 percentage points lower this year – meaning at the zero level if the central bank hadn’t gradually loosened its monetary policy and embarked on QE.
All Draghi had to offer was an extension of the QE programme for at least six months into the spring of 2017, and a decision to expand the list of eligible bonds to local and municipal governments. The ECB kept its main refinancing rate that is the rate at which banks pay to borrow money from the ECB, unchanged at 0.05 percent.
The ECB last lowered the deposit rate, the interest rate the ECB charges banks for parking funds at the ECB, driving the rate deeper into negative territory to minus 0.2% in September past year. The forecast for 2016 was cut to 1 per cent from 1.1 per cent, and for 2017 to 1.6 per cent from 1.7 per cent. The prediction for economic growth in 2016 was kept at 1.7 per cent and for 2017 was revised higher to 1.9 per cent from 1.8 per cent.
Now Draghi said that the stimulus will be considerably larger. After all, it is widely expected that the Federal Reserve will raise United States interest rates for the first time since 2006 when it meets this month. Core inflation, which strips out volatile food and energy prices, is also low, hovering persistently around 1%. The euro has strengthened (which won’t help the Eurozone economy) and stock markets have fallen on the announcements.
“The markets had already been pricing in a deposit rate cut, and some investors had actually been looking for a bigger cut – maybe of 15 to 20 basis points”, Hantec Markets’ analyst Richard Perry said.
A perceived lack of ambition in the European Central Bank’s latest stimulus efforts left financial markets with a niggling worry on Thursday that even “Super Mario” Draghi might not be able to drag euro zone inflation back up to target. In a preliminary estimate from Eurostat on Wednesday, the Eurozone consumer price index held at 0.1% growth year-on-year in November, missing forecasts of 0.2%.
According to Jasper Lawler at spread betting firm CMC Markets, “every metric of the ECB’s easing was less than expected by markets”.
“The economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets and moderate global trade”, Draghi said.
Draghi stressed that risks to the world economy and to the inflation outlook remained skewed to the downside and added that he did not rule out the use of other instruments if needed.
Advertisement
Jonathan Loynes at Capital Economics also said the European Central Bank had “failed to live up to its own hype”.
