ECB: A Bruised Consensus and Decision

Published on December 3, 2015

As opposed to performances of late where European Central Bank President Mario Draghi has been relaxed, confident, and even jovial, today he was defensive, curt, evasive, and at time almost combative with the press in explaining the additional easing measures adopted by the ECB in his traditional post-meeting question and answer session.

Indeed the only hint of a smile on Draghi’s face in the entire hour was in the mention of a congratulatory note he had just received from the EU Ombudsman – a note congratulating the ECB on the measures it had undertaken to enforce basic black-out rules it was already supposed to be enforcing to begin with. The only thing more painful to watch may have been the battered P+Ls as markets swiftly and viciously unwound a substantial degree of accommodation both on the rates and currency side, accommodation that had been grindingly built in over the last few weeks in anticipation of today’s meeting.

*** The curt tone of the presser we believe clearly reflected a full understanding by Draghi that today’s easing measures would fall short of market expectations. But perhaps even more damaging than that, this meeting and press conference bear all the hallmarks of a contentious debate within the council where Draghi did not get everything he may have wanted or pushed for. ***

*** And perhaps even more problematic, for all the forecasts of stabilization in the Eurozone economy and pledges to do more if needed that will be sure to follow, markets take the modest easing actions of today as a poor omen for the likelihood of any future actions to follow for a while. ***

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Like Saint Peter, three times Draghi was asked by reporters whether the new -0.3% was now indeed the lower bound of the deposit rate. And three times Draghi absolutely and curtly shot down any discussion of that topic at all.

Clearly this was a contentious point of debate within the Governing Council – as was we suspect Draghi’s proclivity to publically get ahead of his fellow Council members in pushing for additional measures more often than not, including in what many had expected to be a sleepy October meeting in Malta.

Likewise three times he was asked why the ECB did not increase the size of bond purchases along with announcing a six month extension of the program. And three times he flatly evaded that question as well, pointing instead to the agreement that was reached by the Council on the reinvestment of maturing bonds.

That agreement on reinvestments, we noted in our latest report, was one we expected would be a part and parcel of the rationale and messaging behind extending bond purchases in order to avoid an actual contraction or “cliff effect” once many of the short term notes the ECB has been buying roll over.

But the ECB now pointing to the impact of these reinvestments in avoiding a premature tightening will do very little to make up for unmet expectations of an actual consensus – even if a small and token one – to proactively front load and add accommodation through additional purchases, or even the signaling that could have been had for very low cost by going a mere 5 basis points deeper on the negative rate side where consensus was a little easier.

Warning Signs though Mixed Signals

For all that we cannot say we were not warned that the impetus for more aggressive easing measures was waning in the Governing Council in light of data points that were showing modest signs of improvement since the summer and even since the last ECB meeting in October, including a forecast revision that we expected would show only a “modest” adjustment in the inflation forecast (see SGH 11/24/15, “ECB: Easing Despite Waning Urgency).”

We also had ample signs that for the ever growing market expectations of an increase in the bond purchase program above and beyond an extension this was not a measure still without some controversy, and that delivering a deeper cut on the negative deposit rate was a measure that had greater consensus among all council measures at this point in time than an increase in the Asset Purchase Program (see also SGH 11/16/15, “ECB: Delivering in December”).

But where we were frankly wrong footed and the main reason we did not dial back our calls for a potential modest increase in QE purchases and the possibility of a deeper than 10 basis point move on the deposit rate as much as we should have was due to the extremely aggressive, public comments, including a speech most notably made on November 20 on the eve of the black-out period, from Draghi himself, in which he boldly pledged among other things “if we conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate [our emphasis added].”

And it was most likely that last minute communication on top of numerous other similar bold comments by the President himself that led much of the street to not dial down, but in fact double down, on their ECB calls and risk positions in the run up to this meeting.

And so while the Governing Council is putting a bold face on the easing measures that were agreed to and announced today, it is with full knowledge that what was delivered was indeed – as pointed out immediately by numerous journalists – on the light side of expectations, expectations that to be frank were front an foremost fueled by Draghi himself.

And that is not without consequences, or lost to markets.

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