The European Central Bank is widely expected to unleash a mix of stimulus measures on Thursday, which could include a reduction to interest rates and several changes to its asset purchase programme, as it battles stubbornly low inflation and feeble growth in the euro area.
Since the October meeting, ECB President Mario Draghi has reiterated that the bank will review its stimulus measures this month and will do everything possible to bring inflation to its target of ‘below, but close to 2 percent’.
Draghi’s repeated assertions have made Thursday’s ECB action a “done deal” for investors who are now speculating the different steps the bank will announce. The mood is reflected in the depreciation in the euro and falling government bond yields.
“It looks close to impossible for Draghi not to deliver on Thursday,” Carsten Brzeski at ING Bank said.
“It is difficult to see a clear market consensus on what Santa Mario should bring on Thursday,” the economist added.
The ECB is set to announce its latest policy decision at 7.45 am ET in Frankfurt and Draghi will hold his customary post-decision press conference at 8.30 am ET, when he is expected to announce fresh stimulus measures.
The ECB’s rate-setting body called the Governing Council, led by Draghi, is widely expected to raise the size of its monthly asset purchases to as much as EUR 80 billion from EUR 60 billion and also extend the EUR 1.1 trillion programme beyond its September 2016 deadline till January 2017.
The bank is also expected to expand the scope of its asset purchase programme to include regional and corporate bonds. The asset purchase programme was launched in March.
Analysts also said that a 15-20 basis points reduction in the deposit rate, which at present is -0.20 percent, is also possible after Draghi revealed in October that policymakers discussed interest rate cuts.
Further, some economists predicted that the ECB would launch a two-tier deposit rate that will introduce variable rates for banks, based on the amount of money they park with the central bank. The move will be aimed to discourage banks depositing excess funds with the ECB instead of lending to the real sector to support economic growth.
The refi rate is widely expected to be left unchanged at a record low 0.05 percent, though some economists are also looking forward to a modest reduction.
Going by his track-record, Draghi promises big and delivers more. However, proposals for more easing are likely to face opposition in the Governing Council. Further, a widely anticipated rate hike in the U.S. this month also complicates the picture.
A known prominent opponent, the Bundesbank Chief Jens Weidmann, said last month that monetary stimulus measures already taken by the ECB need more time to have a real impact on the Eurozone economy. He also warned that maintaining ultra-loose monetary policy for a long time raises the risk of loosing their efficiency and could bring more side-effects into play.
Meanwhile, November inflation figures released on Wednesday strengthened the case for further stimulus as they revealed an unexpected easing in core inflation. Though consumer prices rose for a second straight month, the pace remained modest at 0.1 percent. Core inflation eased to 0.9 percent from 1.1 percent a month ago.
Draghi is also set to unveil the latest ECB Staff macroeconomic projections for Eurozone on Thursday. In September, ECB Staff lowered growth projections, and predicted 1.4 percent growth for this year, 1.7 percent for 2016 and 1.8 percent for 2017.
Inflation forecasts were also revised down in September, mainly due to lower oil prices. The projection for this year was 0.1 percent and it was 1.1 percent for 2016. The outlook for 2017 was cut to 1.7 percent. Economists expect the ECB to lower inflation forecasts further.
Recent data on the 19-nation economy is a mixed bag. Growth slowed to 0.3 percent in the third quarter from 0.4 percent. Meanwhile, survey data released on Thursday confirmed that the private sector growth improved in November. Economic sentiment is at a four-year high, while unemployment is at a four-year low, but the figure remains in double-digits.
And will any stimulus measure on Thursday be the end of the easing cycle? Probably yes, say analysts, at least for the near future. However, Draghi may choose to leave the door open for further easing by dropping any reference to interest rates at lower bound.
“We still expect the ECB to introduce its old forward guidance, stating that policy rates could go lower, but we do not believe the ECB will actually have to cut further,” Danske Bank analysts said. “Instead, we see this as the end of the easing cycle.”
The material has been provided by InstaForex Company – www.instaforex.com