ECB president Mario Draghi announced a downgrading of the 2015 growth forecast from 1.6% in September to 1.0% while monetary policy remains unchanged.
“Compared with the September 2014 ECB staff macroeconomic projections, the projections for real GDP growth have been revised substantially downwards. Downward revisions were made to the projections for both domestic demand and net exports,” Draghi said.
In response to Draghi’s announcement, the euro rose by 0.97% to the dollar, stock markets declined with the DAX dropping by 1.2%. The drop was more pronounced in Italy and Spain, with the Milan FTSE MIB declining by 2.8% and the Ibex 35 by 2.28%, the CAC 40 dropped by 1.5% according to Bloomberg.
For Yves Kuhn, CIO at Banque Internationale à Luxembourg, sees low oil prices are a key reason for the ECB’s decision not to change monetary policy
“The ECB needs to understand especially any second round effects of this drop. Draghi clearly moved the expectations on a full blown quantitative easing further out to the beginning of 2015. It was important that he stressed several times that any decision on quantitative easing might not be taken in full unanimity,” Kuhn says.
Scott Thiel, deputy CIO at Blackrock comments on the ECB’s planned expansion of its balance sheets: “It is significant that the ECB changed the wording around the expansion of the balance sheet in the prepared introductory statement from “expected” to “intended” but did not go as far as setting such expansion as an explicit policy “target.” In addition, when asked about the decision to go from “expected” to “intended”, he revealed the decision was not unanimous. This in turn suggests that a unanimous decision on explicit balance sheet expansion may be harder to agree upon in the future.”
“Volatility has increased in the last few weeks and we see the potential for further volatility as liquidity issues arise once markets begin to focus on the large imbalances and crowding in certain sectors that formed during the protracted era of very loose monetary policy and when the divergence of monetary policies does become more pronounced” Thiel adds.
Martin Harvey, fixed income fund manager at Threadneedle Investments comments: “the ECB would be very happy to avoid a further step into the unconventional in 2015 but at this stage they appear to be as resigned to the prospect as the market.”