Reaction in the overnight European markets would have you believe that the European Central Bank (ECB) did not act on policy. Equity markets ended in red, bond yields inched up and the euro was back above 1.08/dollar after the ECB decision, from near 1.05 before. It was more a case of over-promise and under-delivery. After weeks of build-up, the actual decision fell short of expectations. The ECB cut the deposit rate by -0.10bp to -0.30%. Existing QE program was extended by six months to Mar17 and regional/local governments bonds were included in the shopping list. Upon maturity, principal payments of securities under the asset purchase program will be re-invested back into the pool. Officials assured that more action will be taken if conditions warrant the need. 

The biggest disappointments were over a less aggressive cut in the deposit facility rate and no increase in the size of QE purchases. This measured action was likely a step to accommodate cautious members in the Governing council and factor in broadly stabilising growth indicators, even as inflation remains subdued. ECB's staff projections expect inflation to remain low and below-target at least over the next two/three years. Beyond this year's 0.1%, the forecast for 2016 was cut to 1.0% from 1.1% and 2017 down to 1.6% from 1.7% previously. On growth, the outlook was more positive, with this year's growth seen at 1.5% from 1.4% previously. 

Next year's stands at 1.7%, while 2017 was revised up to 1.9% from 1.8% previously. Beyond policy action, focus will be on whether yesterday's policy steps will be sufficient to spur growth and price pressures. Weak energy prices, a negative output gap and economic slack have kept inflation readings way below the ECB's target of 2%. In addition, the limited impact of QE in the US and Japan does not set an encouraging precedent. Since QQE2 was rolled out late last year, the Bank of Japan's balance sheet has ballooned to 70% of GDP. Three phases of asset purchases took the US Fed's balance sheet to 25% of GDP, before the program ceased last year. 

The ECB's balance sheet will expand to 33% of GDP by Mar17, after yesterday's changes. A combination of supply and demand factors has kept inflation targets out of reach in Japan and the US, while a strong recovery proves elusive. It is unlikely to prove any differently in the case of the Eurozone. However policymakers can ill-afford to not act. With Jan-Nov inflation at zero and growth yet to find a firm footing, authorities will remain vigilant about deflation risks. A deflationary environment will raise real interest rates, exacerbating some member countries' sizeable debt levels. Keeping the euro weak will also help to ease monetary conditions and provide a much needed boost to exports and manufacturing activity. In all, the ECB is likely to consider further action and stay dovish despite the risk of a temporary and shallower impact on economic conditions.