ECB policy decision: Draghi fails to live up to his reputation

President Draghi has a long track record of not only meeting but indeed exceeding market expectations. His 'whatever it takes' approach has been of paramount importance to the marked improvement in confidence and credit availability across the region, and the consequent strengthening of economic growth. Following a very dovish speech delivered toward the end of November, expectations for decisive action were once again high. But at the December 2015 meeting, Draghi's strong track record seemingly came to an end. Albeit broadly in line with the expectations, the measures introduced are best characterised as a disappointment to the market, as the immediate market response is testament to. Further, that the decision was not unanimous suggests another 'more substantial' policy easing is a long way off. 

The main alterations to the ECB's policy stance agreed to by the Governing Council overnight included a 10bp cut in the deposit rate to -0.30bps; an extension of the duration of the asset purchase program (of at least) six months to March 2017; and the inclusion of regional and local European government debt to the list of securities that the regional central banks can purchase. Furthermore, to aid short-term liquidity, main refinancing and threemonth 'long-term' refinancing operations will be continued for "as long as necessary". Confidence and term liquidity will also be aided by the decision to "reinvest the principal payments on the securities purchased under the APP as they mature", again "for as long as necessary". 

From the tone of the press conference and the policy measures delivered, it seems that we have entered a new period for ECB policy easing, one which will only see policy accommodation incrementally adjusted to suit current and expected real economic growth and the inflation pulse. On this front, the ECB remains optimistic, expecting continued momentum in the Euro Area economy. Specifically, on their current forecasts, growth is expected to firm from 1.5% in 2015 to 1.7% in 2016 and then to 1.9% come 2017. Similarly, while they have been revised down slightly since the last round, their inflation forecasts continue to highlight a belief that price growth will (slowly) trend toward the 2.0% medium-term target, with inflation set to accelerate from 0.1% in 2015 to 1.0% in 2016 and then to 1.6% in 2017. 

"We continue to believe that the ECB will (eventually) need to do more to maintain confidence and credit growth and bolster real economic activity", says Westpac Research.

However, based on the tone of today's press conference, further accommodation is not on the near-term agenda. Looking forward, the response of confidence amongst households; corporates; and investors to this decision will be critical to the policy outlook, so too the Euro's impact on financial conditions.