Martin Santa Brussels
THE EUROPEAN Central Bank (ECB) meeting on Thursday is the prime event for markets seeking clarity on the bank’s response to a stalled recovery, disappearing inflation and the sluggish pace of reform in the euro zone.
Inflation in the e9.6 trillion (R132 trillion) economy dropped to a fresh five-year low of 0.3 percent in August and as the months fly by, the bloc’s cushion against Japan-style deflation is getting smaller and smaller.
Increased geopolitical risks from the intensifying conflict in Ukraine prompted Europe to impose sanctions on its third-biggest trade partner, Russia, a move that dented the faltering economic rebound further.
“Pressure for the ECB to do more has returned, not only because of weak output/inflation data, but mostly following (ECB president Mario) Draghi’s speech in Jackson Hole,” said Frederik Ducrozet, the senior euro zone economist at Credit Agricole.
Draghi struck a new, for some a groundbreaking, tone trying to cajole European governments into agreeing on a common approach to reforming their economies – a drive he sees as necessary to allow the stagnant euro zone to grow with verve.
He will have a hard time selling his message. Countries like the euro zone’s second- and third-largest economies, France and Italy, are not growing and lag significantly with reforms.
So the ECB may have to reach deeper into its policy toolbox, with some analysts betting on an interest rate cut at the meeting on Thursday.
“We expect the ECB to cut all key interest rates by a further 10 basis points, thereby delivering a larger negative deposit rate (minus 0.20 percent) as well as a refinancing rate even closer to zero (0.05 percent),” Nomura wrote in its global market research note.
Beyond the euro zone, the week is packed with monetary policy meetings, with Sweden’s Riksbank, the Bank of Canada, the Bank of Japan and the Bank of England all taking the stage. The latter will be closely watched as investors seek guidance on the timing of an expected policy tightening.
Although no policy action from the Bank of England is foreseen on Thursday, it is expected to be the first major central bank to lift interest rates when it makes a move early next year, just ahead of the US Federal Reserve.
A string of data on the health of manufacturing in the euro zone countries and Britain will shed fresh light on how European businesses feel about their prospects amid the deepening crisis in Ukraine.
The question most ECB –watchers are asking is when, not if, the bank will embark on quantitative easing – the printing of money to buy government bonds, which is the market’s base scenario. – Reuters