FRANKFURT Mario Draghi is leading the European Central Bank into a new policy era.
Although the Italian stuffed his "guidance" on fresh ECB action with caveats and conditions, he opened the door to a new round of policy action that could even involve quantitative easing - a bold step the ECB has previously shunned.
Markets were disappointed that Thursday's ECB policy meeting did not result immediately in concrete crisis fighting measures after Draghi, the bank's chief since November, said last week the bank would do "whatever it takes" to preserve the euro.
But Draghi's room for maneuver is limited by Germany's powerful Bundesbank, which he singled out in his post-meeting news conference as having expressed reservations about the decision to explore "outright open market operations".
The Bundesbank's reservations mean the ECB will only buy Spanish and Italian sovereign bonds after euro zone governments activated the region's bailout fund to do the same. This in turn would happen only if countries requested such aid.
The lack of immediate action may have underwhelmed markets but Holger Schmieding, economist at Berenberg Bank, said that on balance, Draghi delivered on his promises.
"Whatever the short-term gut reaction of markets today, the ECB announcement today constitutes serious progress," said Schmieding. "This time, the ECB explicitly vowed to do what it takes to achieve its target."
Financial markets had rallied in the run-up to Thursday's ECB meeting in the hope the bank would come up with concrete crisis fighting measures.
After Draghi presented the ECB's plans, Italian and Spanish bonds yields rose, European shares extended falls and the euro fell against the dollar in volatile trade.
Draghi is getting ready to deliver but first he needs to make sure the bailout funds are involved in order to assuage Bundesbank chief Jens Weidmann, whose predecessor quit in protest at the ECB's last round of bond purchases - a program he felt amounted to monetary financing of governments.
Fleshing out a plan he hinted a week ago, Draghi took a heavily conditioned step on Thursday towards a new round of bond buying to drag down Spanish and Italian borrowing costs.
The ECB would also consider other "non-standard" measures to rein in the euro zone crisis, he said, hinting it might move to quantitative easing - or printing money - by not withdrawing all the money it creates to buy bonds.
Barclays Capital said the remarks were "a clear sign that the ECB is prepared to change policy significantly at its September meeting, in terms of purchasing debt without claiming seniority subject to the EFSF being deployed to buy government debt".
A Reuters poll of nearly 50 economists taken after Draghi's news conference said the ECB would gear up to buy sovereign bonds on the open market under certain conditions rated Draghi a 7 out of 10 for his performance on the job until now. But the scores ranged from two to 10, where 10 was the highest.
SEPTEMBER MEETING EYED
Markets will now set their sights on the ECB's September policy meeting. Some economists have already penciled in another interest rate cut for September on the back of an update of the ECB's staff projections for the economic outlook.
Lena Komileva, at G+ Economics, is one of them: "The ECB's press conference has essentially confirmed that another rate cut is coming and that the door to a negative deposit rate remains open and is subject to evaluation."
Another cut could see the ECB starting to charge banks for parking money with the central bank overnight in a move to encourage them to use their access funds to lend to other banks, companies or households or purchase assets instead.
And while some in the market were caught on the wrong foot by Draghi's comments, the ECB chief himself was very pleased by the impact of his words.
Asked whether it wouldn't be appropriate to be a bit more careful, Draghi said: "No, it would not actually. I like these remarks very much."
"And they were not misinterpreted, simply markets took their actions based on their expectations following these remarks. That's what happened and these expectations are what they are."
Some analysts said Draghi was trying to gloss over the fact that he had come up short of the expectations he aroused with his "whatever it takes" comment in London last week.
Referring to Spain's 10-year bond yields over the past week, which fell after Draghi's comments in London and spiked again after Thursday's news conference, Monument Securities' Ostwald said:
"I believe his economics and communications teachers would have him in detention and on extra homework for a very protracted period."
(Additional reporting by Sakari Suoninen. Editing by Jeremy Gaunt.)