Pressure is on ECB ‘to do its part’ again

Mario Draghi has dropped yet another hint that the European Central Bank might expand its stimulus plan next month. Having delivered the message, he must now deliver the goods.

Let’s recap a little. Draghi underwhelmed markets in December when the ECB prolonged its quantitative easing programme and cut the deposit rate for banks to minus 0.3 per cent, a record low.

Explanations from Frankfurt failed to curry enthusiasm. As markets slid in January, the ECB chief all but pre-announced another boost to the endeavour in March. Market turmoil has since worsened amid a sharp selloff of major European bank stocks, worries which come on top of concern about China and other emerging markets. Now Draghi says the ECB is “ready to do its part” to make the euro zone more resilient.

It is fair, therefore, to assume that there won’t be much tolerance for anything less than a decent boost to the programme. After all, Draghi said the ECB “will not hesitate to act” if it deems that market turmoil or lower oil prices could weigh further on prices.

With euro zone inflation well off the target of close to 2 per cent, this came on the day that Germany’s Bundesbank cut its inflation forecast to 0.25 per cent from 1.1 per cent. This is significant as Germany accounts for 25 per cent of the euro zone, so near-term inflation trends there seem to be going in the wrong direction.

Moreover, the German camp within the ECB is always presumed to be at the centre of opposition to further stimulus. In theory, the declining inflation outlook in the heartlands of the Bundesbank should make it easier for Draghi to appease any German naysayers in March.

In practice, the market has reached the same conclusion.

Anticipation of an enhanced dose of QE helped fan a continued rebound in European markets yesterday, and the euro weakened. Draghi made his name as the ECB chief who would whatever it takes. Another fateful decision looms.