Once again, despite offering very little new or unexpected information, ECB President Mario Draghi managed to bring plenty of volatility back to the markets. In the run up to the press conference, the markets appeared to have positioned itself for a typically dovish and downbeat Draghi, but that was not really what we got. After outlining more details of the program that had already been leaked, Draghi was quite optimistic on the economic outlook for the euro area, revising growth higher both this year and next (from 1% to 1.5% this year and from 1.5% to 1.9% in 2016) and championing the impact of their stimulus on the region already.
This year’s downward revision to inflation was quite predictable given the deflationary environment the region currently finds itself in and the 0.7% forecast given in December. Despite revising its inflation forecast for this year to 0%, Draghi was quick to point out that oil prices are largely responsible for the downward revision and due to that and ECB stimulus, its inflation forecast for 2016 was actually revised higher. Markets did not react well to its 2017 forecast though as the ECB effectively acknowledged that even with this program, it would fall short of its below but close to 2% target over the next three years. Now, this is clearly quite a subjective mandate but clearly the markets do not deem 1.8% to be close enough and the ECB is not confident in itself to deliver 2%. As always, these forecasts were conditional on a number of factors which we all know by now never pan out as the ECB expects.
*The above projections were taken from the March 2015 ECB staff macroeconomic projections for the euro area. The full report can be found here.
Greece, like Cyprus, was all but ruled out of taking part in the QE program for the foreseeable future, with Draghi pointing out that in order to purchase bonds the government cannot be involved in a bailout, its bonds must be investment grade and no more than 33% of issued bonds can be held by the ECB. Greece fails on all three counts, the latter due to its participation in the SMP program and it therefore looks likely that even if Greece does exit its bailout, it will be a while before it could be considered for QE. As for bonds with negative yields, as long as the yield is not below the deposit rate (-0.2%), the ECB would be happy to purchase them. This could have been a problem for countries like Germany which has many bond maturities that are currently offering negative yields.
All things considered, I will be very surprised if this program does not run past September next year, which Draghi did leave the door open to. A few things we’ve learned from the eurozone over the last five years is growth is always lower than forecast, reforms take much longer than hoped and governments do not stick to their fiscal targets. This is not a mix that gives me any optimism that the ECBs ambitious forecasts are any more reliable now than they’ve been in the past.
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