ECB reaction: Draghi overpromised
Simon Ward
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The ECB badly mishandled its communications strategy in the run-up to today’s meeting, with comments from President Draghi and leaks about 20 different easing measures being under consideration encouraging market expectations of much more aggressive action than the announced 10 basis point cut in the deposit rate and six-month extension of QE at an unchanged pace. The suspicion is that Mr Draghi overplayed his hand and ran into stiff German-led opposition based on doubts about the economic case for further easing and objections to an income transfer from core to peripheral banks implied by a larger cut in the deposit rate. With headline inflation set to rebound, surveys signalling solid GDP growth and M3 expansion above the ECB’s “reference value”, markets may conclude that the window for further action has closed, putting a floor under the euro, especially with Fed Chair Yellen remaining resolutely non-committal about a second US rate rise.
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