The last meeting of the European Central Bank’s Governing Council on 8 December to decide monetary policy for the Eurozone resulted in an extension of the bank’s Quantitative Easing (QE) bond buying programme. That much was expected.

What surprised the markets, however, was the rate and size of bond purchasing that Mario Draghi and the other council members agreed upon.

Instead of the expected 6-month extension with a maximum €80bn of purchases per month, they instead chose to extend the program by 9 months, with a lower cap on purchases of €60bn. This unexpected extension saw the Euro sell off against its UK and US counterparts, however since 20 December has maintained a steady recovery against both.

With the ECB springing a surprise on markets just in time for Christmas, are we likely to see more unexpected moves at tomorrow’s first meeting of the GC in 2017?

This year is set to be a crucial one for the Eurozone both economically and politically. Having already listened to UK Prime Minister outline her plans for Britain’s exit from the European Union, the heads of European’s Central bank will now also have to focus on a range of elections across key member states.

Beginning with the Netherlands in March, economic powerhouses France and Germany both go to the polls in April and September respectively, with the latter being particularly important for the ECB.

Germany is viewed as the engine room of the European economy, and rightly so. The country’s GDP is the fourth largest in the world behind the US, China and Japan, and (until fears surrounding Deutsche Bank surfaced in September 2016) also the most stable country; the majority of other European countries holding German bunds is testament to this.

Therefore the ECB would be unwilling to allow the country’s economy to suffer as a result of its wider policy. However, for that exact reason the bank is put in quite the predicament. With German inflation accelerating faster than the rest of Europe (and fast approaching its target of 2%), the ECB’s German contingent, headed by the Bundesbank leader Jens Weidmann, will be hoping that Draghi would act quickly to avoid the German economy suffering due to increased inflationary pressures. Yet herein lies the problem; the looming German election hinges on the performance of the right-wing, Eurosceptic Alternative for Germany (AfD) party. Tired of Germany propping up weaker Eurozone economies (notably Greece and Italy) the party has regularly reacted negatively to the ECB’s past interest rate decisions that have damaged the German economy. It is their percentage of votes in the 24 September election that could prove to be the downfall of Angela Merkel, who’s current coalition is in danger of being broken up should AfD receive a noteworthy backing from the German people.

As a result, Draghi and co. will be looking to change policy as little as possible in order to maintain an unbiased political position, although Wiedmann will remain at the door should Germany’s economy continue to run hot.

There is potential for growth forecasts to be changed in the run up to the March extension of QE, however this would require significant pressure for Draghi to break his New Year’s Resolution for the ECB to be as boring as possible in 2017.

Henry Croft, Research Analyst, 18 January