As expected, the ECB chose to keep key interest rates unchanged at its December meeting, but provided a marginally gloomier outlook than some had been expecting.
According to the Bank’s monthly statement, the lower inflation, subdued monetary dynamics and weaker real GDP growth meant that it would need to reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments “early next year”.
Markets, however, were hoping for a much clearer indication of when the ECB would engage in sovereign QE, ideally a sign that something could be expected in January.
However, Draghi refused to take the bait during the press conference following the statement.
“Early means early,” he said, “It doesn’t mean at the next meeting. It depends very much on how our assessment will go. We’ll certainly have a lot of facts to examine, namely and especially the big movement in the price of oil and what the impact of this is going to be, not only on economic activity, but also on inflation.”
Salman Ahmed, global fixed income strategist at Lombard Odier IM was one of those disappointed by the answer.
“We expected a step forward in confirming that they are very close to doing QE. We didn’t get it- Draghi was less committed than he should have been. Instead he is saying he will wait for further deterioration in the inflation numbers before acting.”
But, he added, that Draghi focused on the oil price is worth noting. “By saying that cheaper oil affects medium term inflation expectations, he’s signposting he expects inflation will decelerate further, presenting him with the justification he needs to pull the QE trigger. It just means we have to wait for those lower energy costs to feed through to the inflation data.”
Another point worth noting, said Yves Kuhn, chief investment officer at Banque Internationale à Luxembourg, was that Draghi stressed”several” times that any decision on QE might not be taken “in full unanimity.”
“Draghi clearly moved the expectations on a full blown quantitative easing further out to the beginning of 2015,” he added.
What the bank did do, however, was change slightly the word used around its plans for balance sheet expansion, changing from “expected” to “intended”.
When asked at the press conference, about the change, Draghi said that the executive board was not unanimous on the intention.
Scott Thiel, deputy chief investment officer of fundamental fixed income and head of the global bond team at BlackRock said: “This in turn suggests that a unanimous decision on explicit balance sheet expansion may be harder to agree upon in the future.”
As Draghi explained in his introductory remarks, there are clear indications of a weakening in the euro area's growth momentum, which to a downward revision of the outlook for euro area real GDP growth in the most recent forecasts.
"The latest data and survey evidence up to November confirm this picture of a weaker growth profile in the period ahead. At the same time, the outlook for a modest economic recovery remains in place."
He added that, while on the one hand, domestic demand should be supported by monetary policy measures, the ongoing improvements in financial conditions, particularly in relation to the changes in oil prices, while on the other taking account of the continued effects of high unemployment and large “unutilised” capacity.
All eyes are now pointed toward January and, in the interim, the success of those measures, like the TLTROs that come into effect .
