ECB at its December meeting announced to cut the deposit rate by -10 bps to -0.3%, effective December 9. The main refi rate and the marginal lending rate stayed unchanged at 0.05% and 0.3% respectively. At the press conference, President Mario Draghi announced extension of asset purchases by 6 months, suggesting purchases would continue until end March 2017, or beyond if necessary. Regional and local government debt are now included as eligible assets for buying in the program. Yet, the ECB maintained the pace of asset buying at 60B euro/month. The euro rallied to as higher as 1.089 against USD before retreat while Stoxx 600 has fallen almost -2%, signaling the market was disappointed by the magnitude of the easing measures. Indeed, some had anticipated a strong deposit rate cut to -0.4% and acceleration of the pace of asset purchases from 60B euro/month.
Draghi unveiled that the decision was not made with unanimous vote but there’s “a very large majority in favor of this package”. Regarding why not trimming the deposit rate more, Draghi explained that the economy has been recovering continuously in the Eurozone, as driven by consumer spending. This suggested that previous stimulus worked. Draghi noted that previous policies have been “effective, in improving credit conditions and financial market conditions, and in the real economy”. He emphasized that the central bank adds stimulus “because it works, not because it fails”, suggesting that without the QE measures, inflation would be -0.5 percentage points lower in 2016 and -0.3 percentage points lower in 2017, and QE is boosting GDP by +1 percentage point between 2015-2017.
On the economic projections, the staff has raised the growth forecast to +1.5% for 2015, up from +1.4% in September’s estimate. Growth is expected to accelerate to +1.7% in 2016 (unchanged) before improving further to +1.9% in 2017 (previous: +1.8%). The staff has trimmed the inflation forecasts for 2016 and 2017, Annual HICP inflation is now expected to reach +0.1% in 2015 (unchanged from September), before accelerating to +1% in 2016 (down from September’s +1.1%) and +1.6% in 2017 (down from September +1.7%). As Draghi noted, there are “continued downside risks to the inflation outlook”.
Draghi has received a number of questions regarding why not cutting the deposit rates more and not increasing the pace of asset purchases. He, however, stressed that the ECB is “confident” the measures are “adequate to achieve our objectives”. He also added that the decision to reinvest the principal is important as it lengthens the time horizon. Yet the President hinted that the door remains open for additional measures as the central bank is not excluding the use of all other instruments should the economic conditions warrant. The market is obviously disappointed by the decisions. The euro rallied to as higher as 1.089 against USD before retreat while Stoxx 600 has dropped almost -2%
Draghi Over-Promised, Underneath-Delivered. Euro Jumped to One-Month Excessive
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