Why Draghi failed to convince the markets?

In the Q&A round with journalists, Draghi proved utterly unable to advance any figure on the assets likely being footed by the ECB. Observers felt baffled by this queer and incongruous way of launching a quantitative easing measure. He only acknowledged the vague intention to reverse the ECB balance sheet back to its 2012 level,  thus adding an extra trillion, but refused once and again to produce a precise amount for the plan.

Things turned worse when he noticed the plan would remain closely linked to inflation performance. An unfortunate reference on the conditions leading to its switch-off even before ushering it in. Moreover, the loose and vague reference to inflation opened a Pandora’s Box for the markets. For, they firmly bet the ECB would buy assets so long as dwindling inflation expectations, on all maturities, remained subdued reflecting the current sluggish mood in the Eurozone economy. Draghi’s unfortunate comment rose doubts on this commitment, should a sudden surge in short-term prices lead them close to the 2% threshold.

Draghi conveyed the impression stiff opposition within the ECB to non-conventional monetary policy held him hostage. Hopes of a full QE involving sovereigns look more unlikely after yesterday’s feeble performance. The ECB seems back-pedalling from last month stance, betting on currency depreciation and sooner than expected US rate hikes for filling up the Eurozone growth gap. A move likely to backfire should the downwards trend gain momentum. No wonder the ECB faltering will for implementing the asset-buying plan dismays the markets.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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