Falling European inflation has seen ECB president Mario Draghi indicate the ECB will look at further adding economic stimulus when it next meets in March. The tone of the comments were very ‘dovish’ and the USDEUR immediately dropped 140pips. Euro bond yields all fell in response.
The ECB has got itself into an awkward position whereby inflation is below target but markets are sceptical the ECB is fully committed to tackling the problem. The minutes of the 3 December ECB meeting show some discord in the way the problem is tackled and whether the problem needs tackling at all. One governor suggested he would only be in favour of further bond buying if deflation was present while another said that the effects of QE diminished over time. Both comments would suggest there is a lack of commitment to the inflation target of 2.0%.
Central bank credibility is increasingly in the spotlight since the Swiss central bank reneged on its commitment to maintain the Swiss franc/Euro peg in January 2015. Markets are increasingly less convinced about central bank ability to alter market outcomes and less inclined to rely on the words of central bankers. This is a problem for Draghi who is seen as jawboning about QE but often lacking action.