Markets across the globe surged after Mario Draghi’s words. Yesterday, the Chairman of the European Central Bank (ECB) hinted at the possibility of stepping up the stimulus program as early as March, after holding the governing board meeting in Frankfurt. However, the ECB decided to hold back for the time being, making no significant announcements and meeting expectations.
In his address today during the World Economic Forum annual meeting in Davos, Mr. Draghi reiterated that the ECB has the firepower to combat low inflation and economic threats. “We have the determination, willingness and capacity of the Governing Council to act and deploy them,” he stated during a meeting with the Financial Times.
Markets reacted positively to the unexpected announcement: Yesterday, the main stock exchanges rallied, while risk premiums of peripheral countries dropped and the Euro fell against the dollar to 1.08. This morning, the Ibex 35 opened to a 2% increase and by 11.10 it had already gained 2.94%.
All eyes will now be set on the March deadline, when the ECB will be expected to announce the new measures and to issue a downward revision of its economic estimates. According to BBVA Research, this revision will include a significantly lower inflation forecast – driven by the decline in oil prices - and a more than likely downgrade of the global outlook.
Since December’s monetary policy meeting, uncertainty has increased due to a combination of renewed financial stress - affecting mainly emerging markets - and a sharp decline in commodity prices. For this reason, although lower oil prices are benefitting the Eurozone, they have also forced to cut inflation forecasts.
Mario Draghi also offered some reassurance for banks, making it clear that the ECB is not planning on setting any further capital requirements or provisions to cover their risk-weighted assets. Mario Draghi clarified some of the “misunderstandings” that have been published recently regarding the Italian banking sector. The distribution of a questionnaire among Italian institutions regarding their management of loan default risk does not imply additional provision or capital requirements for banks.