ECB falls short of providing stronger forward guidance in terms of further rate cuts

ECB President Draghi announced a 10bp depo rate cut, time extension of QE until at least March 2017, and inclusion of regional and local government debt in the PSPP in the meeting yesterday. It disappointed the market significantly and drove euro stronger, higher bond yields and lower stock prices.
 
Regarding the updated macroeconomic forecasts, the ECB left the projections largely unchanged, as expected. Specifically, inflation was marked down by 0.1% in both 2016 and 2017, while real GDP growth were marked up by 0.1% in 2015 and 2017.

ECB fell short in providing forward guidance, by neither extending QE at least until the inflation expectations reach 2%, nor by mentioning the possibility of further depo rate cuts, there was no reference to lower level in his speech.

"It did not remove the yield floor for government bond purchases, which would have also re-inforced the forward guidance, and increase somewhat the pool of eligible assets, although such a decision could be announced at a later stage" opined Barclays. 

His announcement was highly disappointing the markets, specifically as there were broad expectations on a larger cut in the deposit rate. There was appreciation in the EUR as a result to 1.08 against USD and 5Y5Y euro HICPx swap was down by 4-5bp.