The ECB justifies its latest moves with a further drop in inflation expectations and disappointing economic data since the last rate cut in June. In our view, however, nothing has changed fundamentally since June on the economic front nor with regard to the inflation outlook. It was already evident back in June that economic momentum was slowing down. That the deterioration in business sentiment, probably prompted largely by geopolitical concerns, does not necessarily have to go hand in hand with negative hard economic data is illustrated by the jump in new orders seen in Germany in July.
The “fine-tuning” currently being conducted by the ECB harbors considerable risks. The markets could start demanding further expansionary measures at ever shorter intervals and, if not fulfilled, react with market volatility and sharp swings. Draghi’s statement that some Council members had called for more radical measures suggests that speculation about full-scale security purchases will not wane as long as the economic outlook does not improve substantially. At all events, today’s decisions have not made a measured exit from ultra-loose monetary policy any easier.