Markets hit as Draghi disappoints on QE hopes

Markets have reacted negatively to the latest comments from European Central Bank (ECB) president Mario Draghi, which appear to have squashed expectations for further monetary support.

Mr Draghi was speaking following the latest meeting of the ECB, where the central bank decided to keep its base interest rate and monetary policy measures unchanged.

In his statement after the meeting, the ECB president said the central bank would reassess its monetary stimulus measures “early next year”.

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He also revealed ECB staff were already working on the “technical” preparation for additional easing measures, which could entail the purchasing of government bonds, just in case they need to be implemented next year.

But in response to a request to clarify when the ECB might embark on extra easing measures, Mr Draghi revealed the ECB would not do so at the next meeting in January.

The comments appear to have disappointed the markets, implying more easing may be further away than some had hoped.

European stockmarkets have already begun to sell off substantially, while European government bond yields are rising, which is a negative for bond investors as it means prices are falling.

The bearish outlook was stoked by “significant” downward revisions to both economic growth and the inflation outlook for the eurozone since the last ECB predictions in September.

The central bank now expects 1 per cent GDP growth in 2015 and inflation of 0.7 per cent, substantially below the ECB’s target of 2 per cent.

Sandra Holdsworth, fixed income manager at Kames Capital, said monetary policy was unchanged in spite of “a downward revision to their estimates of GDP growth and inflation in the eurozone in the years to come”.

“This marks the third consecutive downgrade of their estimate for GDP growth in 2014 and fourth downgrade of forecast inflation levels,” she said.

“The accompanying statement reiterated their intention to expand the ECB’s balance sheet to levels pertaining in 2012.

“To do so, further policy measures such as the purchase of sovereign bonds would appear likely but have not been confirmed.

“At this stage, there appears to be a lack of agreement amongst the governing council over this policy option which has to be a concern for the eurozone.”