European Central Bank (ECB) boss Mario Draghi cut the ECB’s key deposit rate by 0.1% last week, pushing it down to -0.3%. He also extended the ECB’s quantitative easing (QE) programme by six months, promising to print €60bn a month until March 2017. Yet the euro surged against the dollar – rising 4.5%, its biggest move since 2009 – while European equities and bonds both fell.
In short, he didn’t do as much as markets had expected. “Managing expectations is at least nine-tenths of effective monetary policy,” says David Shipley at Bloomberg. In that sense, “Draghi failed”.
The market reaction saw Draghi back-peddle furiously on Friday, stressing that “there cannot be any limit” to how far the ECB goes to boost the eurozone economy. As Gavyn Davies noted on his Financial Times blog, “Draghi’s apparent volte-face has left investors needlessly confused”, but in fact, “nothing much has changed”. Even after its rally, the euro is still down since Draghi launched QE in January, while growth has risen, deflation risk has fallen, and bond yields are moving in the right direction.
And in reality, says Ambrose Evans-Pritchard in The Daily Telegraph, it’s only in the context of today’s ultra-loose monetary policy that Draghi’s move could be seen as anything other than dovish. As well as negative interest rates, the ECB has now added another €360bn to its balance sheet. Indeed, despite opposition from Germany, Draghi is pushing stimulus to new extremes, says Evans-Pritchard. The money supply is turning into a flood.