Constancio Says Markets `Got It Wrong' Prejudging ECB Stimulus

  • ECB vice president says plan was recalibration, not new QE
  • Euro rose, stocks and bonds fell Dec. 3 on stimulus adjustment

European Central Bank Vice President Vitor Constancio said investor expectations going into the Governing Council’s Dec. 3 policy meeting were misguided, and that he hopes for a market correction once the new stimulus measures are fully appreciated.

“The fault lies with the markets,” Constancio said in an interview with CNBC broadcast on Friday. The Governing Council’s decision was “exactly what the Executive Board proposed” and “what we did is adequate,” he added.

The euro rose as much as 3.5 percent on Thursday and German 10-year bond yields climbed the most since 2012 after ECB President Mario Draghi announced a deposit-rate cut and an extension to quantitative easing that fell short of investors’ expectations. Draghi and colleagues had spent weeks signaling mounting concern that inflation expectations were at risk of becoming de-anchored.

Constancio said investors had misread the central bank’s reaction function and that the intention was always to recalibrate the current stimulus rather than implement a new form of QE.

“Financial conditions are better than they were in October when we first announced the reassessment,” he said. “There are measures in our package that will kick in as time goes by and will be prolonged beyond 2016. That will produce an effect on inflation.”

He also said that further alterations to stimulus could be made.

“Depending on events, we still have measures in our toolkit that can be used and that’s important for markets to know,” Constancio said in the interview. “We have tools to adjust to significant changes in the overall situation.”

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