ECB's Draghi runs into opposition

The ECB didn't ease monetary conditions as much today as President Draghi had hinted at. In particular, the ECB Council did not choose to increase the volume of monthly bond purchases or to drop the reference to a possible end to these purchases. Draghi is now evidently coming up against more opposition. While overoptimistic growth and inflation forecasts suggest that the bank will probably relax its stance again next year, the ECB president obviously and happily does not have sufficient support within the ECB Council to act on a grand scale.

Most observers were expecting an increase in the monthly volume of bond purchases to form the key element of today's measures. In addition, many market players were expecting the ECB to drop any reference to a possible date for ending bond purchases. Fortunately, none of this happened. After fuelling hopes in Frankfurt two weeks ago of a major step, Draghi was evidently unable to get his way in the Council. Instead, the Council opted for a smallest common denominator: The deposit rate has been cut from -0.2% to -0.3%. The date at which bond purchases might be ended has been shifted from September 2016 to March 2017. The ECB is to reinvest the principal payments from maturing bonds and buy bonds issued by regional authorities.

Draghi didn't manage to act as he wished with a bolder move today, as recent economic data haven't been too bad. This is also apparent from the latest forecasts from ECB economists, who have not lowered their optimistic growth projection for 2016 since September and have even raised their projection for 2017 a little.

Draghi and the other advocates of easy money will not give in after today's defeat. They could, for example, cite core inflation, which has dropped recently to only 0.9%.

"We predict a figure below rather than above 1% next year, which means that at its next forecast session in March the ECB could be forced to lower its 2016 core inflation forecast (1.3%) quite substantially. Even though Draghi no longer has enough support for a big easing step (increase in monthly purchase volume), the ECB is likely to relax its monetary policy again next year. We are thinking here above all of another cut in the deposit rate of 0.1 percentage points to -0.4%, probably at the March meeting. Draghi did after all refuse today to call the deposit rate of -0.3% the lowest limit. Moreover, it is feasible that the ECB could again move the tentative date for bond purchases to beyond March 2017", says Commerzbank.