Markets fall as European Central Bank fails to confirm future euro stimulus

European stocks dropped sharply yesterday after a lack of further stimulus from the European Central Bank (ECB) left investors disappointed.

 

The Eurostoxx index of various european stocks fell by 1.74 per cent while the euro rebounded from a two-year low of $1.23 to $1.238 later in the day.

 

The ECB’s policy rates were kept on hold. The failure to confirm any future stimulus came despite downgrades in the ECB’s forecasts of GDP growth and inflation to one and 0.7 per cent respectively for 2015, down from 1.6 and 1.1 per cent in September.

 

 

The negative market reaction came despite reassurances from ECB chief Mario Draghi that the board which made the decision was “unanimous in its commitment to using additional unconventional instruments within its mandate”.

 

Markets are widely hoping for the purchase of government bonds – quantitative easing (QE) – to be announced. So far, the ECB has only ventured to buy private sector debt where the scope for policy size is much smaller.

 

Draghi continues to have trouble with his German colleagues who are against buying government bonds. German banker Sabine Lautenshlaeger who joins Draghi on the governing board – the group that makes the policy decision – has come out against such measures.

 

“We were disappointed by Draghi’s comments in the press conference. We expected a step forward in confirming that they are very close to doing QE. We didn’t get it – Draghi was less committed than he should have been. Instead he is saying he will wait for further deterioration in the inflation numbers before acting,” said Salman Ahmed, a strategist from Lombard Odier.

 

On 14 January, the European Court of Justice will give its ruling on a programme that rescued markets in 2012 that promised to buy government bonds in an emergency. 

 

The ruling may impact the ability for the ECB to undertake QE, which also involves the purchase of government bonds.