The problem, for the ECB, is that while markets had come to expect significantly more aggressive easing, the current economic outlook for the region doesn’t necessarily imply further stimulus.
Euro depreciation
As Azad Zangana, senior European economist at Schroders points out, recent activity indicators have continued to improve despite the weaker external environment and concerns about security.
“Low inflation has boosted the disposable income of households in real terms, while the resumption of credit flows is boosting domestic demand, aided by low interest rates. Also, the euro had depreciated sharply from around 1.14 against the US dollar since October to just over 1.05.
Marginally positive impact
On the plus side, he points out, the ECB’s decision not to increase the amount of monthly purchases leaves some powder dry in case additional stimulus is needed next year, but he added, at an overall level, the additional stimulus announced today may have a marginally positive impact on the outlook for the monetary union.
“Investors caught out will have to learn to look more closely at data and not expect the ECB to always look to appease them.
Nicholas Wall, a portfolio manager within the Invesco fixed income team agrees but added: “The market had a lot of similar positions on so we will see some of these positions get rapidly unwound here. The biggest danger is that market reaction may put the ECB in an awkward position. A large sell off in bonds and a stronger euro will tighten financial conditions in Europe and make inflation even harder to generate – they may be talking about easing again sooner than they wished.”
