Markets priced a 15bp deposit rate cut ahead of the meeting and most analysts also expected an expansion of the monthly purchases, hence the measures were not enough to fulfil expectations. The ECB was expected to reintroduce its old forward guidance on possibly lower policy rates, implying some probability of an additional cut could still be priced in, but this was not the case. The decision taken today was not unanimous, but based on a large majority. It remains unknown whether some ECB members had argued for more or less easing, but compared to Draghi's previous very dovish comments, it could be that he had argued for more aggressive easing.
In terms of further easing, Draghi declined to answer whether the ECB had reached the lower bound on policy rates. Draghi only said that the ECB is ready and willing to use all prevailing tools. Moreover, he argued that the ECB was confident the decisions are adequate to reach the goal of inflation below, but close to 2% in the medium-term. The ECB revised its HICP inflation forecast slightly lower in 2016 and 2017 and only lowered its core inflation forecast for 2016 to 1.3% from 1.4% and kept it unchanged at 1.6% in 2017.
Draghi expressed optimism about the outlook for GDP growth, and the ECB's projections for activity were revised slightly higher. Added to this, Draghi argued that the ECB's easing measures supported the recovery, saying that QE had been quite effective, credit had become much cheaper and its volumes had become much broader.
The less aggressive move from the ECB together with today's communication indicates that the bar for more easing is quite high. Hence, although the ECB did not deliver the menu of easing, the easing today is expected to mark the end of easing. In the near term, base effects should lift inflation above 1.0% as early as January and the latest economic survey indicators also point to a stronger recovery in 2016. Moreover, with the Fed set to start hiking in December, the downside to EUR/USD from relative rates should weigh on a 3M horizon.
The risk to the expectation of the end of easing is that the ECB will eventually be forced to lower its core inflation forecast, which is still too optimistic. Related to this, the ECB will be challenged by EUR appreciation pressure and the negative impact on inflation. That said, as the unemployment rate quickly approaches its structural level of 9.9%, wage pressure should return and ECB will not ease again.
