The currency markets and share prices spoke volumes. Financial markets waited for Mario Draghi to fire his big bazooka and when it became clear he was holding a peashooter instead, they bought the single currency and dumped stocks. The euro rose against the dollar and screens showing equity prices went red.

The reason for the reaction was simple: markets had expected a lot more. They had been looking for the European Central Bank to announce it was cutting its deposit rate from -0.2% to -0.4%, making it more expensive for commercial banks to hold deposits with the central bank. They got a cut to -0.3%.



More importantly, markets expected Draghi to announce that the ECB was increasing the pace of asset purchases under its quantitative easing programme, from €60bn (£43bn) a month to €75bn or €80bn a month. It was left unchanged.

All Draghi had to offer was an extension of the QE programme for at least six months into the spring of 2017, and a decision to expand the list of eligible bonds to local and municipal governments.

As Jonathan Loynes of Capital Economics noted, the ECB failed to live up to its own hype. The euro has been falling for weeks because of broad hints that decisive action would be taken to raise the eurozone’s inflation rate from its worryingly low level of 0.1%. This was not it.

There are two possible reasons why the ECB might have come to its decision. The first is that it believes the prospects for the eurozone are brighter than they were a few months ago, in part because of easing global financial tensions and in part due to the impact QE is having domestically. That looks unlikely given that the ECB has not materially changed its growth forecasts for the next two years and has revised down its inflation forecasts slightly.

The second – and far more likely – explanation is that Draghi wanted to do more but had been prevented from doing so by divisions on the ECB council. It has been clear for some time that the Bundesbank president, Jens Weidmann, opposes an expansion of QE, and his was probably not the only dissenting voice.

The reaction of the financial markets was entirely rational. QE works through a number of channels: it lowers bond yields; it drives currencies lower and it pushes up asset prices. The euro had been pushed lower and stock markets had been driven higher in expectation that the ECB would do something meaningful. When it didn’t, the markets unwound the positions built in advance of Draghi’s announcement.

The smart money will be on the euro’s rise being temporary. After all, it is widely expected that the Federal Reserve will raise US interest rates for the first time since 2006 when it meets this month. But talk of a further big plunge in the euro look overdone. An increase in US borrowing costs is already in the price. And Draghi has shown all too vividly that the hints of central bankers – even the biggest hints – should be treated with some caution.