ECB’s menu of instruments can be used to surprise markets

The stance at the ECB meeting in October was surprisingly dovish, particularly as Draghi opened the door for further deposit rate cuts. Previously the message had been that the ECB had reached the lower bound on the deposit rate, but according to Draghi things had changed and "the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting".

Regarding the choice of instruments, Draghi said "we are open to a whole menu of monetary policy instruments". Generally, the ECB is likely to have a bias in favour of wanting to surprise the markets and this time also a desire to weaken the euro in order to get a quick boost to inflation through higher import prices. 

"On the back of this dovish stance, the ECB is now likely to cut the deposit rate by 10bp at the December meeting and to keep the door open for further rate cuts. At the same time, an expansion of the QE purchases is expected to EUR75bn per month and that the ECB will continue the purchases until December 2016 while keeping it open-ended as ending it should still be dependent on a sustainable adjustment in the inflation path", says Danske Bank.

Draghi also surprised the market, when the PSPP was launched as the monthly QE purchases of EUR60bn was somewhat higher than ECB's chief economist Peter Praet's initial suggestion of a pace of EUR50bn per month.