The ECB failing to convince needs to act

He depicted the only executive measure approved by the ECB Board as a limited rate cut, downplaying its importance. When urged to clarify his statement, so clumsily did he try to disengage himself from his blunder that he ended up dropping a bigger clanger. He openly admitted the move aimed at discouraging banks from gambling on lower rates in future. In short, the ECB feared they might refrain from underwriting, in a couple of weeks, the first tranche of the huge medium term lending facility under the so-called TLTRO. Thus, Draghi downgraded still further the scope of the measure he was supposed to justify and cast a shadow of doubt on the ability to place this 400 billion tranche.

Accordingly, the 10 basis point cut would merely amount to a canny trick for fending off a potential lukewarm welcome to the brand new facility. Draghi also proved unable to provide a convincing answer on why the impressive rate lowering undertaken in June fell short of delivering the right answer by such a narrow margin. He turned a mastermind stroke into an undistinguished move.

No wonder Draghi recognises the utter inability of monetary policy for coping with the current stagnation and poor prospects in the Eurozone economy. His Jackson Hole desperate call for decisive action by governments, both in fiscal and reform policies, forced the ECB to react in a forceful way. You cannot wait and see where you claim the house being ablaze. Moreover, his attempt to trade off asset-buying for a EU-wide growth plan has backfired, pressing him to undertake a covert quantitative easing move. The ECB will launch next month outright purchases of ABS and covered bonds issued by banking institutions.

Markets have welcome wholeheartedly the new package. Yet, for reasons that run contrary to the ECB aims. They bet on an extended period of low growth and inflation that would keep central bank rates close to zero. The ECB tries but fails to avoid that danger from materialising.