Arab Today, arab today rate cut more stimulus in store at ecb meet
Last Updated : GMT 00:26:33
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Rate cut, more stimulus in store at ECB meet

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Arab Today, arab today Rate cut, more stimulus in store at ECB meet

European Central Bank chief Mario Draghi
Berlin - AFP

The ECB will roll out its big guns at its monetary policy meeting this week, ramping up its trillion-euro asset purchases and cutting key rates to hike weak inflation, analysts said.
Fed up with an inflation rate that is stubbornly far below the target of close to 2.0 percent, European Central Bank chief Mario Draghi has in recent weeks multiplied pledges to "do what we must" to lift consumer prices in the 19-member eurozone.

In what was viewed as an attempt to lay out his case for more stimulus, Draghi also presented a morose state of the economy at a banking conference earlier this month.

"We cannot yet say with confidence that the process of economic repair in the euro area is complete," he said, noting that global growth is expected to be the weakest since 2009, while the rebound in the eurozone is the lowest since 1998.

For Jonathan Loynes, an analyst at Capital Economics: "The question is not whether the ECB's governing council will loosen monetary policy at its meeting on December 3rd, but rather whether it will do so decisively enough to meet the very strong expectations stoked up by its own dovish signals."

"Anything less than a marked acceleration in the pace of its monthly asset purchases and a significant cut in its deposit rate would now come as a severe disappointment," he said.

The ECB launched in March a 1.1-trillion-euro ($1.2 trillion) scheme to help lift consumer prices.

The quantitative easing programme to buy sovereign bonds at a rate of 60 billion euros a month runs until at least September 2016, but inflation came in at zero in October.

At the ECB board's last meeting on October 22, the question of whether to cut interest rates again surfaced as a potential tool to boost consumer prices.

The ECB had cut the rate on its deposit facility -- that is, for funds placed by banks at the central bank, to negative 0.2 percent in June 2014.

That means banks have to actually pay the central bank to hold their cash, thus encouraging them to lend. The rate has remained at that level since.

- Dissenters shrugged off -

Draghi's expansionist stance is not without detractors, with Bundesbank president Jens Weidmann warning against hastily boosting stimulus rather than letting the current package do its work.

But the dissenters "appear to have had little influence on their colleagues," said Loynes.

Berenberg analyst Holger Schmieding also said that "experience tells us that the ECB council usually follows Draghi's lead in such contentious discussions".

"With no inflation risks whatsoever, a further stimulus would certainly do no damage even if the benefits may not be very pronounced either," he said.

The current bout of weak inflation is underpinned by persistently low petrol prices.

Central bankers of the 19-member eurozone are keen to fight falling prices because they can be poisonous for the economy, creating a vicious circle of falling demand and fewer jobs.

While falling prices might appear to be good for consumers, deflation can become entrenched if consumers delay purchases in the hope of lower prices later, which in turn prompts companies to hold off investment.

For Commerzbank's chief economist Joerg Kraemer, the ECB may simply "make a decision in principle... and defer the clarification of further details to a later meeting".

"The ECB's main objective is probably to achieve the strongest possible effect on the markets. To do so, the markets must be convinced that the ECB is doing all it can to achieve its inflation objective," said Kraemer.

The bank is therefore likely to meet market expectations of more stimulus, as well as "announce further steps in the case that its objectives run the risk

 

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