Mario Draghi’s latest bid to revive the eurozone economy by extending unprecedented monetary easing prompted a sharp sell-off on Thursday in markets that had bet on even more.
The European Central Bank pledged to continue its €60bn-a-month bond buying programme for another six months until March 2017 “or beyond”. Policymakers also cut a key interest rate to a historic low of minus 0.3 per cent and pledged to buy more assets with the proceeds of its existing bond purchases.
But these measures, which were supported by a decision to buy municipal bonds in addition to standard government debt, failed to impress investors who had hoped for deeper rate cuts and more monthly bond purchases.
The announcement prompted a sell-off in European equity and bond markets and the euro climbed to a one-month high against the US dollar.
“The ECB delivered at the very low end of expectations,” said Andrew Balls, chief officer for fixed income at Pimco. “There wasn’t much to get excited about . . . markets were expecting an increase in the monthly purchase size.”
Some analysts were less critical.
“Today’s decisions reflect the desire to keep some powder dry in case more stimulus is needed down the road,” said Marco Valli, chief eurozone economist at UniCredit. “Keeping the big bazooka for another day may not be a bad strategy. It just needed better communication.”
The euro extended gains as Mario Draghi, the ECB president, delivered his latest effort to boost an economy that remains exposed to weak inflation and outside shocks. The single currency surged 2.4 per cent to $1.086 by the close of London trade, with the euro’s rise reflecting concerns the measures have proved less aggressive than markets had anticipated.
The index of Europe’s 300 largest listed companies dropped 2.9 per cent in the wake of the ECB announcement. Germany’s Dax fell 3 per cent, France’s CAC 40 lost 3.2 per cent and the UK’s FTSE 100 dipped 1.9 per cent in late-afternoon trading.
In the US, the yield on two-year Treasuries hit a new high for the year of 0.97 per cent, while the 10-year yield rose 13 basis points to 2.31 per cent.
Some analysts also noted that the sell-off reflected the fact investors had bet too heavily on an aggressive expansion of stimulus.
“The market had a lot of similar positions,” said Nicholas Wall, portfolio manager at Invesco. “So we are seeing some of these positions get rapidly unwound.”
The ECB president defended the package of measures, saying they would “reinforce the momentum of the eurozone’s recovery and strengthen its resilience against global shocks”.
The measures passed were broadly in line with a proposal tabled to the governing council earlier on Thursday by Peter Praet, the ECB’s chief economist, who along with Mr Draghi has led the charge for more easing.
More aggressive stimulus would have probably run into German-led opposition from a significant minority on the council, placing the ECB president and his chief economist in an awkward position. The council tends to act only when measures are supported by a broad consensus.
While support for the package was not unanimous Mr Draghi said a “very large majority” was in favour of the measures.
The central bank’s latest forecasts — also published on Thursday — presented stronger figures for growth but downgraded projections for inflation. The ECB now sees inflation at 0.1 per cent in 2015, 1 per cent in 2016, and 1.6 per cent in 2017.
Mr Draghi said the ECB expects the region’s economic recovery to proceed, supported by monetary policy and structural reforms.
Low oil prices should support private consumption and investment, he added, but the recovery “continues to be damped” by weak growth in EMs and weak trade.
The ECB held its main refinancing rate at 0.05 per cent.
* The FT published an earlier story saying the ECB had kept rates unchanged. This was a story written before the decision that was published in error.