Exclusive: ECB lowered stimulus ambitions after hitting opposition - sources

Sat Dec 5, 2015 12:50pm EST
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By Balazs Koranyi and John O'Donnell

FRANKFURT (Reuters) - Hints by Mario Draghi ahead of last Thursday's ECB rate meeting that the euro zone may need another big injection of money backfired, stiffening the resolve of more conservative central bankers who criticized him for raising expectations too high, sources familiar with the discussions said.

The European Central Bank President and his chief economist Peter Praet stoked expectations with dovish speeches in the weeks before the meeting but the ECB’s Governing Council concluded that markets needed to be disappointed this time because the economic outlook has improved and new inflation forecasts were not as bad as feared, the sources said.

A pending U.S. Federal Reserve rate hike also factored into the decision, though to a lesser extent, as policymakers were concerned that a big move by the ECB would weaken the euro further and possibly force the Fed to delay its own action on rates to prevent a too rapid divergence of policy between the world’s top two central banks.

The ECB cut its deposit rate on Thursday and extended its monthly asset buys by six months to boost stubbornly low inflation and lift growth. But the moves were considered by markets to be the bare minimum in the light of the bank’s previous signals.

One source with direct knowledge of the situation interpreted Draghi’s public stance ahead of the meeting as trying to pressure the Governing Council to take bigger action.

"Draghi raised expectations too high, on purpose, and attempted to paint the Governing Council into a corner," the source said. "This was problematic and he was criticized for this by several governors in private."

Unlike last year, when opponents of quantitative easing made their stance public before the decision, the hawks mostly worked behind the scenes.

Opponents worked to curtail proposals coming out of the ECB’s committees that prepared the decisions, ensuring that some of the more radical measures expected by market players never made it onto the table.   Continued...

A general view of the exterior of the European Central Bank (ECB) headquarters in Frankfurt, Germany, December 3, 2015.   REUTERS/Ralph Orlowski