- The ECB does nothing.
- It reiterates threats.
- There's no sense of urgency.
In the face of falling inflation and weakening financial conditions, despite the end of the economic contraction, the ECB stands pat and only offers a reiteration of its threat of some unspecified action if needed. Draghi did tweak his remarks a little, such as committing to swift action if needed and the unanimous agreement about the unconventional policies (which cover wide ground, but is likely a telegraphic reference to BBK Weidmann dropping his objection to QE).
Draghi did acknowledge that QE was discussed at today's meeting, as were other options, and this sent the euro from the highs just above $1.38 to the lows near $1.3740. Draghi also repeated his recent comments indicating that the euro's exchange rate is an increasingly important factor.
The ECB may be wrong to frame the issue in terms of deflation. Even say, for the sake of the argument, the ECB is correct and deflation does not materialize for the region as a whole. The persistence of lower than expected inflation and simply low inflation itself has a detrimental effect on investment decisions, growth, and the weight of the debt burden.
Moody's warned that what it called "lowflation" (the prospects of 0.5%-1.0% inflation until 2018) would "reignite concerns about debt sustainability." Draghi himself explicitly recognized that the low inflation is extending into the medium term. (Though he did not change the view that inflation will be closer to the ECB's target in two years.) There does seem to be some disagreement on how the low inflation data impacts the medium term outlook. Creditors are helped, unless it destroys the ability of the debtors to service their obligations.
Officials can say what they want about how the fall in the price of energy is aggravating and overstating the decline in prices. Leave aside the fact that it does not target core inflation. Leave aside the fact that, in 2008, the ECB justified a rate hike because higher energy prices would have broader knock-on effects.
The fact of the matter is that the core rate has not been above 1% since last August. Producer prices have fallen 1.7% year-over-year in February, which is the steepest pace since late 2009. Moreover, although it is beyond the scope of this note, there is a substantial risk of a further decline in energy prices.