ECB head Draghi’s stimulus efforts leave markets underwhelmed

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For once, European Central Bank (ECB) boss Mario Draghi – dubbed Super Mario for his euro-saving efforts – wasn't so super.

With growth and inflation rates going pretty much nowhere in the euro zone, Mr. Draghi had been expected to haul out the stimulus bazooka on Thursday.

But the new stimulus he unveiled was more like a peashooter, and the European and global markets did exactly the opposite of what he wanted them to do: The stock markets sank to their lowest levels in months, government bond yields rose and the euro surged to its highest level since 2009, making exports more expensive.

The inability to find a fix for the growth and inflation problem seems part of the European disease, or at least the run of exceedingly bad luck. Europe is being battered by the refugee and terrorism crises – geopolitical risks that Mr. Draghi mentioned at his press conference – and the possibility that the passport-free zone in 22 European Union countries may be dismantled, damaging the cherished notion of free trade and free labour mobility that lies at the heart of the EU.

At the same time, Britain's upcoming referendum on EU membership threatens to leave the EU shorn of one of the few economies in the region with decent growth and employment rates. Greece, meanwhile, remains in solid crisis; the chances of its exodus from the euro zone remain as high as ever.

Mr. Draghi's ECB has done an admirable job in keeping the euro zone intact, even if solid growth rates and the 2-per-cent inflation target have eluded him. On Tuesday, he took another shot at increasing the stimulus measures to speed the European healing process, and investors were let down.

The ECB dropped the deposit rate – the rate it charges banks to store cash at the ECB – to minus-0.3 per cent from minus-0.2 per cent. The two other key rates – the refinancing rate and the marginal lending rate – were left unchanged. The quantitative easing (QE) program, which boosts market and corporate liquidity through the purchase of €60-billion ($87.7-billion) a month of government bonds and other assets, is to be extended by six months, to March, 2017, "or beyond if necessary," Mr. Draghi said at the central bank's press conference in Frankfurt.

The QE program, which was unveiled early this year, is to broaden its asset purchases to include regional and local government debt. In addition, the ECB will reinvest the principal payments on the securities purchased under the asset-purchase program.

Economists said the new stimulus measures, over all, were underwhelming given the high expectations before Thursday's announcement. "The disappointment in the financial markets is palpable," said Ben Brettell, senior economist at Hargreaves Lansdown. While the measures contained less firepower than investors had expected, they were tacit admission that the previous efforts, including a €1.1-trillion QE program, were insufficient to perk up the economy and restore inflation rates to anywhere near the 2-per-cent target.

Many investors and economists had expected the monthly asset purchases under the QE program to rise to as much as €75-billion a month. Instead, they were left unchanged at €60-billion a month. They had also expected a deeper cut in the deposit rate, perhaps to minus-0.4 per cent, even though they are at historic lows.

Mr. Draghi defended the ECB's decision to avoid being more aggressive on the stimulus front, insisting that the ECB had done a lot since 2012, when he vowed to do "whatever it takes" to hold the euro zone together and bring down crippling sovereign bond yields, and that the stimulus already in place was working, albeit slowly.

"Let me make this clear: We are doing more because it works, not because it fails … I think these measures need time to be fully appreciated," Mr. Draghi said.

Cutting interest rates and adding stimulus highlighted the economic and monetary gulf between Europe and the United States. Dropping interest rates comes in marked contrast to the strategy being pursued by the U.S. Federal Reserve, which is soon expected to raise interest rates as the American economy chugs forward.

The euro was down about 0.6 per against the dollar immediately before the ECB announcements, then reversed course and surged by almost 3 cents (U.S.), rising to $1.09, when investors took the view that the stimulus package had fallen short of their expectations. European stock markets dropped, with the FSTE-100 losing 2.3 per cent.

Euro zone inflation was last at 2 per cent at the start of 2013. The ECB dropped its inflation forecasts slightly over the last forecasts, made in September. It now expects headline inflation of only 0.1 per cent this year, 1 per cent next year (down from 1.1 per cent), and 1.6 per cent in 2017 (down from 1.7 per cent.)

If the ECB had some good news, it was that euro zone growth continued to go in the right direction, even if was hardly robust. It slightly raised growth forecasts to 1.5 per cent this year, up from 1.4 per cent, and left the 2016 forecast unchanged at 1.7 per cent. In 2017, growth of 1.9 per cent is expected, up from 1.8 per cent.