The European Central Bank decision to stay course does not come as a surprise. The weaker projected inflation and growth figures were expected. The ECB is caught in a difficult dilemma: with its projections, the ECB admits that it will miss its price stability objective over the medium term. But it is wise for the ECB to follow a wait-and-see strategy. Global uncertainty has risen and is very high. The biggest concern for the ECB is not China or the United States, but the disappointing recovery of the euro area.
The risk of stagnating growth in Europe has risen. I expect many more years of a very expansionary monetary policy due to the weaker than expected recovery. The ECB will give only limited weight to the high volatility in oil prices and exchange rates as they only have a temporary and limited impact on inflation. The biggest concern for the ECB is the de-anchoring of inflation expectations. This will make it even harder for the ECB to meet its price stability mandate in the future.
With today’s statements of President Draghi, I see a substantially higher probability of an extension of the ECB QE program, should it come to a further weakening in growth and inflation. It is important for the ECB not to overreact to financial market volatility. I expect a conditional extension of the QE program, until the price stability mandate is met, as the most likely option for the ECB should the economy weaken further.