Mario Draghi’s European Central Bank (ECB) announcements on the morning of December 3, 2015, while stimulative, nonetheless underwhelmed the market; but that does not mean that they were not well thought out. The market’s disappointment, along with its consequential same-day rally of the euro (up +2.6% today) helps limit U.S. dollar upside, and thereby helps Chairman Janet Yellen’s case for an FOMC rate raise on December 16. Net-net, this should be a positive for U.S. markets as it is an indication of central banks working in concert to help economies, even if the central banks move in opposite directions.
ECB expanded the scope of the purchases to include local and regional debt, but will keep the pace of bond purchases unchanged at 60 billion euros a month while extending QE from Sep 2016 to March 2017. This is easy rhetoric with an easy exit clause. If Draghi had increased the pace of purchases, the ECB would have to do that now, but by extending quantitative easing (QE), it gives vocal support to stimulus while preserving the ECB’s ability to reverse the decision down the road if circumstances change.
Importantly, Draghi also preserved flexibility to do more stimulus in the future.
The main announcements were that the ECB:
- Kept the pace of bond purchases unchanged at 60 billion euros a month
- Extended QE purchases from Sep 2016 to March 2017
- Expanded the scope of the purchases to include local and regional debt
- Reduced deposit facility rate by -10bps from -0.20% to -0.30%
- Kept main refinancing rate unchanged at 0.05%
- Kept marginal lending rate unchanged at 0.30%