UBS: ECB Governing Council Meeting - What happened and why?
In line with expectations, the European Central Bank eased monetary policy at their December meeting. However, markets were disappointed by the extent of the measures. Those which were announced came in at the low end of expectations while other, widely anticipated measures were not introduced at all.
04.12.2015 | 15:25 Uhr
As forecast, the ECB cut the deposit rate by 10 basis points while the Quantitative Easing program (QE) was extended for a further six months – the smallest extension priced in by the market. However, the ECB made no move to increase the size of the current program, nor did they introduce a two tiered deposit rate – a possibility which seemed to be under discussion in the last few days.
Two additional modifications were made to the current QE program, namely the re-investment of the principal payments and the inclusion of regional or local government bonds, but these failed to produce a positive market reaction. The former will not start before 2017, and the latter is not seen as positive for sovereign yields as it re-directs some of the ECB purchases away from government bonds.
The ECB continues to see downward risks to the outlook for Eurozone inflation and, for this reason, it re-stated its commitment to do more if necessary. However, Draghi sounded less dovish than market had expected and expressed a high degree of confidence in the success of the QE program to support the recovery.
We think the ECB will continue to keep an easing bias and do not exclude further policy action in the first half of next year. While inflation should pick up somewhat in coming months driven by base effects in the energy sectors, core inflation is likely to remain very low as both domestic and external inflationary pressures remain subdued.
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