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Here's a wrap-up of how markets have taken the news, from the FT's Elaine Moore. In sum: Euro up, stocks down, inflation expectations down. Not what Mr Draghi was hoping for.
An underwhelming deposit rate cut and expansion to the QE programme has led to a sell-off across Europe's markets as investors register their disappointment. Prices in bond markets are down across the region, with Germany's 10 year bond yield up from 0.46 per cent to 0.58 per cent and double digit basis point moves in Italian, Spanish and Portuguese bond yields. The ripples have also also extended to the eurozone's neighbours, pushing down bond prices in the UK and Switzerland. Equity investors have pushed the index of Europe's 300 largest companies down 2 per cent and the euro has jumped from a near-eight month low against the US dollar, reaching $1.08. The market view of eurozone inflation also appears to have taken a hit following the ECB's announcement. The much-followed "five-year, five-year-forward" break-even rate which measures market inflation expectations starting five years from now and running for five years has dipped from 1.80 per cent at the start of December to 1.77 per cent.
Jonathan Loynes at Capital Economics sums up the markets' disappointment at today's ECB announcements.
Hopes that the ECB would make up for the disappointingly small cut in its deposit rate (to -0.3%) with a decisive expansion of its asset purchase programme have been dashed by the announcement that it has merely extended the programme from September 2016 to March 2017.
Of course, it’s possible that the slightly better news on the economy over recent weeks persuaded the Governing Council that more aggressive action was not necessary. And Mr Draghi has left the door open to further policy loosening in the future. Nonetheless, together with the rate cut, this will be seen as a clear disappointment in the light of the repeated extremely dovish signals from the President and his colleagues.
The press conference is over, and the investor reaction remains one of disappointment, in spite of the QE extension and the cut in the deposit rate.
Here's the link to Draghi's opening statement
A question on the Paris terror attacks and the economic effects. Draghi says the frank answer is "we don't know". The situation ahead is full of geopolitical risks, and they're well aware the conditions may get worse because of these risks. So with regard to measures announced today, there's "confidence but no complacency".
A question from Nikkei - how can you avoid risks and side-effects from QE? Draghi says ECB is aware these risks exist, but there is no evidence so far these side effects have materialised yet. There has been no increase in leverage comparable to the pre-crisis period.
Some questions on Greece now. The pension reform is already raising instability fears, do you share them? Draghi bats that away then hands on to Constancio the vice president. He says with regards to QE, it doesn't depend only only the successful completion of the review, it's complex.
Draghi is asked whether some purchases by Banca d'Italia and Banque de France under ANFA border monetary financing. He says there is no monetary financing.
Draghi is asked about fiscal policy. Do you want more fiscal stimulus in countries such as Germany? Do you think the neutral fiscal stance for the eurozone as a whole advocated by the commission is appropriate? Draghi says they will have a view on the appropriateness of the fiscal stance and whether the flexibility exercised before and after the Paris terrorist attacks and the refugee crisis is justified.
We're onto the extension of QE. How close is the commitment to extend to "open ended asset purchases"? Not really, Draghi says. He stresses again the importance of the reinvestment - it means the bonds will stay on the balance sheet after March 2017.
Draghi says during the quiet period there will be no discussion with representatives of financial institutions.
Draghi is asked about the extension to the asset purchase scheme. This could lead to the ECB balance sheet to reach 40 per cent of eurozone GDP. Draghi responds that the balance sheet of a central bank is an instrument, which should be used to meet the objective of price stability. Draghi says the ECB has the instruments to drain liquidity when necessary.
Next question: Does the ECB consider the plight of its neighbours when it's doing monetary policy?
Draghi says: it's an important question they ask themselves all the time. "We're bound by our mandates, national mandates, just like the Fed, BoE etc. But does that mean we don't talk to our colleagues? No certainly not. There's extensive explanation of the reasons why we do certain things, we have the effects of "spillovers" in mind, but we're bound by our mandates."
Draghi is asked whether cutting the deposit rate is intended to push down the value of the euro. He answers that cuts in the deposit facility vastly improve the transmission of monetary policy.
Some more reaction from Aberdeen Asset Management's Patrick O’Donnell.
Draghi has over promised and under delivered. Markets won’t be particularly impressed. Everyone was expecting Draghi to be the white knight for Europe once again and he hasn’t really showed up. Today’s measures amount to tinkering around the edges. They may help the European economy a bit, particularly signalling that excess liquidity and therefore accommodative monetary policy for even longer. But if the ECB isn’t going to do more pre-emptive measures then it is even more important that European politicians get on with reforming their economies. Europe’s economy relies on trade and the global outlook for that is pretty dire. Today’s measures buy European politicians a bit of time but are no panacea. Unfortunately very few European leaders have the stomach to fight for the reforms their countries need.
Now we're onto a question on the muni bond market - how big is this market for the ECB? What other assets could you expand into?
Draghi says it's too early to say the extent of the purchases in regional bonds.
Draghi emphasises the fall in oil prices is having a dampening effect on core inflation. He says real disposable income and consumption are rising, QE is translating into improving economic conditions in the euro area.
The FT's Claire Jones is up next and asks why core inflation has not budged since the announcement of QE and why this package should have a different effect.
Next question: why didn't you increase the size of monthly purchases? And are we at the lower bound for the deposit rate?
Mr Draghi says he has a menu of options, plenty of tools. The asset purchase programme is flexible, we can always adjust. We're not going to be hampered in doing this by technical issues. We're going to review some of the technical parameters on our programme in the spring. We're not excluding the use of all other instruments if we were to decide they were the right ones to do.
But he declines to answer the question about the lower bound.
Draghi re-iterates that QE has been effective. Market-based financed conditions have eased, and euro area bond yields - both sovereign and corporate - have fallen. The cut in the deposit facility rate has enhanced the power of the transmission mechanism. The cost of credit has fallen by 80bps. He adds that to achieve that under normal circumstances one needs a reduction in interest rates by 100bps. Plus the transmission has been faster. For the more vulnerable member states the reduction has been 140bps. Draghi says in the absence of these measures, inflation would be 0.5 percentage points lower next year and 0.3 percentage points lower in 2017. QE is boosting GDP by 1 percentage point between 2015-7.
The FT's Elaine Moore notes there's one market that's been buoyed by the ECB announcement:
At least one area of Europe's financial markets is happy. Regional bonds issued by Germany are rallying on the news that the ECB is going to include regional and local government debt in its bond buying programme. Rabobank puts the market at €377bn, dominated by Germany and Spain.
The decision was not unanimous, Draghi says. He adds there was no mistake in the ECB's communication.
WSJ's Charles Forelle is noticing a pattern to these journalists' questions...
Second question is again on disappointment among market players. Did you over-estimate your ability to convince other council members? Are market participants not getting how powerful? Also, was the decision unanimous?
Mr Draghi highlights the decision to reinvest the principal, which he says is important because it lengthens the time horizon. "We are confident these decisions are adequate to achieve our objectives."
Frederik Duzocret, an ECB-watcher, lists the likely sources of market disappointment.
The ECB introductory press statement is now up:
First question for Mr Draghi: Why didn't you do more?
Mr Draghi replies: we are witnessing a gradual but continual recovery. The drivers are accomodative monetary policy, less fiscal headwinds, and the oil prices supporting real disposable income. He says overall the conclusion was "our policies have been effective". The question then was: have they been effective enough? No, we have to do more. "We are doing more because it works, not because it fails. We want to consolidate something that has been a success."
Guntram Wolff, director at Bruegel, says we should not expect the ECB to solve all problems.
ECB-watchers disappointed:
Draghi repeats that other policy areas should help the recovery. He calls for structural reforms to raise productivity. He calls for fiscal policy to support the recovery, while staying within the EU rules. All countries should strive for more growth-friendly composition of fiscal policy.
Markets unimpressed so far, reports FastFT:
The euro is still cranking higher (up by over 2 per cent on the day at pixel time) while bonds are falling along (Spanish 10-year yields are up by some 18 basis points) with stocks are sinking.
ECB now sees HICP inflation at 0.1 per cent in 2015, 1 per cent in 2016 and 1.6 per cent in 2017. The outlook for HICP inflation has been revised downwards slightly.
The FT has just issued a correction on the earlier mistake in the ECB coverage.
Earlier today we published an incorrect story on FT.com that stated the European Central Bank had confounded expectations by deciding to hold interest rates rather than cut them. The story was published a few minutes before the decision to cut rates was announced.
The story was wrong and should not have been published. The article was one of two pre-written stories — covering different possible decisions — which had been prepared in advance of the announcement. Due to an editing error it was published when it should not have been. Automated feeds meant that the initial error was compounded by being simultaneously published on Twitter.
The FT deeply regrets this serious mistake and will immediately be reviewing its publication and workflow processes to ensure such an error cannot happen again. We apologise to all our readers.
The prospects for growth are broadly unchanged since September.
Mr Draghi says they expect the economic recovery to proceed, supported by monetary policy and structural reforms. Plus low oil prices should support private consumption and investment. However, the recovery "continues to be dampened" by weak growth in EMs and weak trade.
The ECB also announces it will continue conducting the MROs and 3-month LTROs as fixed rate procedures with full allotment as long as necessary.
The ECB decides to reinvest the principal of assets bought under QE. It will also include local government bonds in QE.
The ECB extends the asset purchase programme to run until March 2017 or beyond if necessary and in any case until the Governing Council sees an improvement in inflation.
Mario Draghi repeats that the ECB has cut the deposit rate to -0.30 per cent.
Mario Draghi is speaking now
The FT's Elaine Moore has taken a look at the market reaction to the deposit rate cut by the ECB.
Markets are unimpressed by the ECB's rate cut. Prices across eurozone government bonds are dropping, reversing recent record low yields in short-dated two-year German bonds and 10-year Swiss bonds. European equities are down on the day and the euro is rising against the US dollar. The sell-off is likely to continue unless Mario Draghi announces an unexpected expansion in monthly QE purchases or some other kind of surprise in the press conference.
Meanwhile Dan Davies, Senior Research Advisor at Frontline Analysts is not impressed with the decision to cut the deposit rate.
Maxime Sbaihi, Bloomberg eurozone economist, has more thoughts on today's deposit rate cut.
CFR's Benn Steil says rates can go lower:
Jonathan Loynes at Capital Economics sees the size of the rate cut as disappointing but adds the press conference may still deliver more.
The cut in the ECB’s deposit rate from -0.2% to -0.3% comes as a bit of a relief after incorrect last minute reports that it had left rates unchanged. But it is still something of a disappointment in the light of the extremely dovish signals given by a host of ECB officials over recent weeks ... perhaps the ECB will make up for any disappointment on the rate cut with a bigger QE expansion. We shall see! Either way, we still expect a bigger divergence between euro-zone and US monetary policy than is currently expected to bring the euro down further against the US dollar, to below parity next year.
The FT has published a correction at the bottom of the ECB news story, which says:
* The FT published a earlier story saying the ECB had kept rates unchanged. This was a story written before the decision that was published in error.
There'll be more explanation to follow.
Philippe Goudin at Barclays is impressed with the decision to cut the deposit rate.
We believe that the most effective monetary policy measure to boost inflation in the short term was a deposit rate cut, which translates into a weaker euro and therefore higher imported inflation. This measure is particularly appropriate given the low probability we assign to a pick-up in inflation mainly as a result of the significant spare capacities and still subdued pace of economic growth.
The policy statement had more than just the announcement of a rate cut:
Further monetary policy measures will be communicated by the President of the ECB at a press conference starting at 14:30 CET today.
More reaction coming in, this from ING's Carsten Brzeski:
First part of Santa Mario’s early Christmas presents. The ECB just announced a cut in the deposit rate by 10 bp to -0.3, from -0.2%. At the same time, both the refi and the marginal lending facility rate were kept unchanged. This is less of a rate cut than markets and we had expected, probably showing that the hawks at the ECB had more leverage than expected. In the last run-up to the announcement, markets become fragile on the back of some news that the ECB would not have cut at all. That was the ECB’s first part of what we expect to be an early and copious gift giving for the Eurozone. Even though it did not come through a chimney but only with a press announcement. The rate cut shows the ECB’s determination to further weaken the euro exchange rate and thereby supporting economic growth through exports.
The FT's Claire Jones first take on the ECB's deposit rate cut is up:
The first reactions to the decision are coming in. Here is Patrick O’Donnell, investment manager at Aberdeen Asset Management.
"“The prophecies were correct. A cut of this order will underwhelm markets. We’re going to have to hope for further measures in the press conference if today is going to have any impact on Europe’s prospects.”
The story published by the FT just before the decision was an error. Tweet from FT here:
The full ECB statement is here
The ECB cuts the deposit rate to -0.30 per cent
FT markets commentator Jamie Chisholm has the latest on the market moves ahead of the decision:
Just before the ECB decision and the markets are in fairly chipper mood. The prospects of a soft euro and low interest rates is pushing the FTSE Eurofirst up 0.7 per cent. The single currency is off 0.6 per cent to $1.0544, less than 100 pips above a 13-year low. Two-year German Schatz yields are down 1 basis point to a record low of minus 0.45 per cent.
Wall street looks set to rebound, with the S&P 500 in line to recover 14 pf the 24 points lost on Wednesday.
Equity markets are chipper - they're expecting big things. Here's the FT's Joel Lewin:
European equities have bounced to a three-and-a-half month high this morning, buoyed by the prospect of further easing ahead of the intensely anticipated ECB meeting later today. European stocks have now returned to levels not seen since a heavy sell-off hammered shares at the end of August, as markets fretted about China's economic slowdown. The Eurofirst 300 has jumped 0.8 per cent this morning, taking it to a three-and-a-half month high of 1,526. The index has risen 14 per cent since it hit a low for the year at the end of September.
Here's what RBC Capital's rate strategists are telling their clients this morning. In sum: don't underestimate Mr Draghi.
EUR: Further easing at today’s ECB meeting is all but a foregone conclusion, but economists are split on what form that easing will take. Almost all expect the deposit rate to be cut further into negative territory (consensus -10bp to -0.3%) and our economists are in the more aggressive camp, looking for a 20bp reduction. According to a Reuters survey, most expect to the ECB to also either extend the size of the monthly bond purchases (to EUR75bn from EUR60bn) or extend the QE commitment beyond the current September 2016 (our economists are in the latter camp). With expectations of aggressive easing so deeply entrenched, it would be easy to make a case for going into the meeting long EUR. President Draghi’s track record of delivering beyond market expectations, however, cautions against such a stance.
The euro's been under pressure for months as expectations have risen over more QE in Europe, and rate hikes in the US.
Welcome to the live blog - 15 minutes to go before the ECB's rate decision and anticipation is high. For a great primer on what the market expects - and why that might be hard to deliver - read this piece by our Frankfurt bureau chief Claire Jones.
Key paragraph:
Most of the governing council’s policymakers will support the charge led by ECB president Mario Draghi and his chief economist Peter Praet for an injection of fresh stimulus. But idiosyncrasies in voting rules and concerns that doing too much, too soon risks leaving the central bank out of options in the event of further economic deterioration could produce a less aggressive package than markets have priced in.
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