FXStreet (Delhi) – Peter Vanden Houte, Chief Economist at ING, notes that after weeks of speculation that major additional monetary stimulus might be in the offing, the markets only got a 10bp deposit rate cut and the lengthening of the Asset Purchase Programme until March 2017. Key Quotes “The outcome of the meeting of the Governing Council clearly reflects the contrasting views on the economic developments. On the one hand, the economy seems to be holding up well despite some headwinds such as the slowdown in emerging markets, Volkswagen scandal and recent terrorist attacks and threats.” “On the monetary front, one could also question the need for further stimulus. Monetary aggregates have been picking up again lately, and a survey by the ECB of SMEs shows that access to finance is no longer a headache for European companies.” “The main worry for the ECB remains stubbornly low inflation, with Frankfurt now increasingly focusing on core inflation. In that regard, the fall in core inflation to 0.9% YoY in November (from 1.1% in October) was indeed a reason to undertake more monetary stimulus.” “We see more flexibility regarding the Asset Purchase Program, something Draghi also seemed to suggest. With the assets eligible for purchase now broadened to regional debt, an increase in the size of the Program now appears feasible. This will be conditional on the strength of the recovery. In the current circumstances, it doesn’t seem to be needed, but should the recovery show signs of faltering, the ECB will not hesitate to increase the size of the Asset Purchase Programme.” “One shouldn’t forget either that despite the disappointment regarding the ECB’s November decision, the monetary decisions will have significant effects on markets. With the lower bound now lowered, the Euribor3m is likely to fall even further and is likely to hover close to -0.20% throughout 2016. Given that excess liquidity is unlikely to be absorbed rapidly after the end of the Asset Purchase Program in March 2017, as the ECB will reinvest the bonds coming to maturity, money market rates are likely to remain negative until the end of 2017. Theoretically, the ECB’s decisions should also lead bond yields to remain low longer, although we still expect some steepening as the markets will start to anticipate tapering in the second half of 2016 on the back of a somewhat more positive economic backdrop. According to the ECB, QE has shaved off about 120bp from sovereign bond yields, a figure close to our own estimate. This implies that as the end of the programme approaches, yields should indeed move higher in anticipation.” For more information, read our latest forex news.