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The hesitancy and indecision that has pervaded financial markets this week was a reflection of the mistrust that has grown of whether the European Central Bank (ECB) will ever truly deliver upon the expectations Draghi creates. However, today we have seen the ECB truly out-deliver expectations with a package of monetary easing measures that span across the whole range of tools at the committee’s disposal. There was no indecision this time around, with cuts across both the refi and deposit rates, alongside four new TLTRO’s and crucially a €20 billion monthly increase to the QE programme. Given the deterioration in inflation, manufacturing, consumer sentiment and financial markets in the past three months, such a drastic shift is justified, yet unexpected nonetheless.
The market reaction has been relatively predictable, with the euro tumbling over 1% and DAX up 1.50% in the immediate aftermath. The big question is whether this will be enough to drive bullish momentum for the coming weeks in a bid to end the stock market downturn that has dominated 2016 so far.
There is a big difference between market and economic response to any monetary policy decision and ultimately this round of easing will be judged down the line by the ability of the eurozone to finally exit the downturn of recent years. Inflation has been arguably unresponsive to previous easing and with substandard growth despite a plethora of previous measures, there is little reason to believe this will truly be the golden bullet for the eurozone.