The euro has come under heavy selling pressure and European stocks given a timely boost on Thursday after ECB President Mario Draghi dropped a very clear and deliberate hint that further monetary stimulus is likely at the next meeting in March.
It was always likely that Draghi’s message was going to be dovish today given the turmoil in the markets so far this year and near 30% decline in oil prices (40% decline since the cut-off date prior to the last ECB meeting). That said, I don’t think people anticipated such a blatant and clear warning of a monetary policy response at the next meeting, when new macro-economic projections will assist policy makers in determining the appropriate response.
Draghi’s comments today suggest bold action is going to be necessary in order to overcome the new deflationary pressures and downside risks to the euro area. It’s worth remembering though that ahead of the December meeting, people were convinced that the ECB was going to bring the bazooka only to find out it instead came armed with a water pistol. While I doubt they’ll make the same mistake again, we should perhaps be careful not to expect too much from the central bank again. There was and remains some very influential and hawkish members within the central bank, something Draghi appears to sometimes forget when placed in front of the cameras.