Draghi disappointed the markets

Draghi left the door open for further actions if necessary mentioning “the asset purchase program could run beyond March 2017 if necessary and in any case until the Governing Council sees a sustained adjustment in the path of inflation”

If inflation should be more than welcome to dilute the huge amount of debt held by both the private and public sectors; ageing, digitization and developments of robotics plead for more deflationary forces in the future suggesting quantitative easing could be increased beyond March 2017. On top of that, the ECB also announced its intentions to reinvest principal payments of maturing bonds purchased under the asset purchase programme.
Finally, the ECB released the staff macroeconomic projections for growth and inflation. Growth expectations were positively revised by +0.1% to 1.5% and 1.9% for respectively 2015 and 2017 and the 1.7% forecast for 2016 was left unchanged. Regarding inflation, the ECB left its forecast for 2015 unchanged at 0.1% but lowered by 0.1% its 2016 and 2017 expectations to respectively 1.1% and 1.7%.

Overall, these decisions should not negatively impact European growth in the quarters to come. Financial conditions remain accommodative in the Euro area, which are particularly important for European governments. Low interest payments are helpful to balance their budget / reduce their deficit but should not prevent them to take structural reforms to improve their growth prospects. A quantitative easing not coupled with structural reforms will not be the most effective solution.

Hans Bevers – Senior Economist – Petercam IA