ECB meeting to be closely watched for stimulus talk

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The European Central Bank is expected to hint at fresh stimulus measures to ward off the threat of deflation when it holds its next monetary policy meeting on Thursday.

This week’s gathering takes place in Malta, under the governing council’s policy of occasionally departing from its Frankfurt HQ to visit other areas of the eurozone.

But although the location will be different, the event will be dominated by familiar concerns after the region’s inflation rate fell below zero last month, to -0.1%, for the first time since March.

City economists predict that ECB president Mario Draghi will repeat his pledge from September to add more stimulus if needed. However, few expect decisive action this week.

“The ECB’s October meeting is for watching. Draghi’s message will be dovish, but it’s not time to act yet”, said Holger Sandte, chief European analyst at Nordea Bank.

The ECB is currently committed to buying €60bn (£40bn) of government and corporate bonds each month until September 2016, in an €1.1tn (£810bn) attempt to stimulate growth, inflation and bank lending.

But last week, ECB policymaker Ewald Nowotny declared that it was “quite obvious” that additional instruments would be needed, as the ECB is now “clearly missing” its inflation target.

Nowotny’s comments mean that “further ECB stimulus as soon as next Thursday certainly cannot be ruled out,” said Howard Archer of IHS Global Insight.

Capital Economics’s Jonathan Loynes said that ECB will boost its QE firepower €80bn a month in December, but does not totally rule out an announcement this week.

The eurozone’s return to negative inflation is driven by cheaper energy costs, which fell 8.9% year-on-year following the tumble in oil prices. This countered a 1.2% rise in service sector prices, and a 1.4% rise in food, alcohol and tobacco costs.

Eurozone inflation rate, to September 2015
The eurozone and EU inflation rate, to September 2015. Illustration: Eurostat

Eurozone firms are also being squeezed, and receiving less for their goods. Producer prices fell by 2.6% year-on-year in August last year, their steepest annual fall since February, suggesting deflationary pressures are building.

Yann Quelenn, market analyst at Swissquote Bank, said investors already anticipate that the ECB’s QE programme will be extended beyond next September. But a formal announcement may not come until early 2016, he adds.

“By officially announcing an extension of QE, Draghi will be essentially admitting that the monetary programme is not as efficient as it should be,” said Quelenn.

“For this reason, we believe that he will hold off on making any official commitments for the moment but will continue to drop hints.”

Last month, rating agency Standard & Poor’s declared that the eurozone will eventually need $2.4 tn of QE.

The governing council must also digest recent disappointing economic data from the eurozone’s largest economy.

“German data for August saw sharp falls in exports and industrial production; perhaps a result of slowing global demand,” said Chris Hare of Investec.

Hare also said that Draghi will continue to emphasise a willingness to add more stimulus if needed on Thursday, but will not announce fresh measures just yet.

The ECB’s position is complicated by the uncertainty over when the US Federal Reserve will raise US borrowing costs. It resisted a rate hike in September, and may now not act this year.

That has weakened the value of the dollar against the euro – an unwelcome development for the ECB because it adds to deflationary pressures in Europe.

Powered by Guardian.co.ukThis article was written by Graeme Wearden, for theguardian.com on Sunday 18th October 2015 15.14 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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