FRANKFURT: The European Central Bank (ECB) is widely expected to step up efforts to kick start chronically low inflation in the euro area at a meeting on Thursday, but analysts warn the measures could fall short of market expectations.
At the ECB’s last monetary policy meeting of the year, President Mario Draghi is set to announce a beefing up of the bank’s controversial bond purchase program, known as QE, and a possible cut in key interest rates, already at historic lows, analysts say.
In a bid to bring eurozone inflation back up to levels conducive to healthy economic growth, the ECB has already unleashed an unprecedented series of easing measures.
It has slashed borrowing costs, made vast amounts of cheap loans available to banks and most recently embarked on a program to buy around 60 billion euros of sovereign bonds each month until at least September 2016.
But area-wide inflation is still stubbornly low, standing at just 0.1 percent in November, far below the ECB’s target of just under 2.0 percent.
ECB watchers therefore believe a new round of action is a done deal.
Andrew Cates at the Royal Bank of Scotland said he was penciling in a further reduction in the ECB’s deposit rate, already in negative territory at minus 0.2 percent and an increase and extension of the QE (quantitative easing) program.
“We expect the ECB to deliver a deposit rate cut to minus 0.4 percent, the monthly asset purchase program to rise to 85 billion euros and an extension of the program to March 2017,” he said.
“Following a succession of dovish signals from ECB officials in recent weeks, and most notably from Draghi, we think anything less than this would risk disappointing market expectations,” he said.
“Santa Mario is coming to Euroland,” said ING DiBa economist Carsten Brzeski.
“After six weeks of speculation and anticipation, we expect Draghi to present a package of rate cuts and additional QE, for the Euroland’s sake,” he said.
But Berenberg Bank economist Holger Schmieding said the discussion within the governing council was likely to be contentious.
Dissenters such as Bundesbank president Jens Weidmann have repeatedly warned against hastily boosting stimulus, insisting that the raft of steps taken so far should be allowed to do their work.
But Schmieding also said “experience tells us that the ECB council usually follows Draghi’s lead in such contentious discussions.”
“The very low level of inflation, the prospect that headline inflation will not get close to the ECB’s target before 2018 . . . gives the ECB the opportunity to scale up its stimulus,” he said.
‘Last desperate attack?’
The ECB is also scheduled to publish its latest updated economic projections at the meeting, which analysts said would provide the necessary justification for the additional easing measures.
Schmieding said he expected the ECB to lower its forecasts for economic growth next year and cut its inflation targets for both 2016 and 2017.
“The ECB will likely emphasize that, on its new projections, it does not expect headline inflation to reach its target before mid-2018. The majority on the council will use this to explain the extension of the asset purchase program,” Schmieding said.
But other ECB analysts were not convinced that an additional rate cut would be all that effective.
With the deposit rate already negative—effectively charging banks to hold their cash with the ECB—the real economic effects of lowering it still further would be limited, said Commerzbank economist Michael Schubert.
“The biggest risk . . . would be if it gave markets the impression that the ECB is doing this because it now has doubts about the success of the asset purchase program. This would give the overriding impression that the ECB had launched one final desperate attack,” Schubert said.
Cates at RBS said the markets had already priced in a cut in the deposit rate of at least 0.15 percentage points. At the same time, “extending the duration of the program beyond next September seems all but inevitable.
“But failure to meet these expectations risks generating a market response that would further compromise the ECB’s objectives,” Cates argued.
The so-called “doves” or those in favor of additional monetary easing would argue that acting aggressively now would be better than “a more muted approach that would necessitate even more aggression in the future and a heightened risk of failure,” the expert said.