The European Central Bank (ECB) is likely to hold fire on new policy moves on Thursday and leave a series of radical recent measures to take their course, despite pressure over a weak economic recovery, analysts say.
Unlike moves by the US Federal Reserve to end its stimulus spree and a surprise monetary easing plan by the Bank of Japan, ECB policymakers are expected to sit tight at their monthly meeting.
The week looks set to be particularly busy for the ECB, which tomorrow takes on its role as Europe’s banking watchdog in a historic shake-up to help ward off another financial crisis.
IHS Global Insight economist Howard Archer said no new ECB decisions were likely for the time being, adding that “the bank will very probably remain in ‘wait and see’ mode into the new year.”
Interest rates are currently at their all-time lows anyway — 0.05 percent for its main “refinancing” rate — and a rate hike seems unlikely at a time when the ECB is seeking to boost inflation from its stubborn lows.
Inflation in the eurozone on Friday edged up to 0.4 percent last month, official data showed, far below the 2 percent target set by the Frankfurt-based ECB, which has a core mission of ensuring price stability.
“If survey-based inflation expectations fall further, the pressure for additional ECB monetary easing will increase,” Commerzbank’s chief economist Joerg Kraemer said.
Current low inflation levels have stoked fears of deflation — when prices actually fall — which, if it takes hold, can trigger a vicious spiral where businesses and households delay purchases, throttling demand and causing companies to lay off workers.
Nevertheless,ING-DiBa economist Carsten Brzeski said the latest “better-than-feared” economic eurozone data was one of several factors likely to allow the ECB to “to wait, at least until the December meeting before possibly deciding on new action.”
In addition, deflationary fears have prompted the ECB to pull out other tools, such as a series of liquidity programs to inject cash into the economy.
After its targeted long-term refinancing operations scheme (TLTRO) to make cheap liquidity available to banks on the condition they lend it on to companies, and a program to buy covered bonds, its latest move to kickstart credit in the eurozone begins this month.
The ECB is launching purchases of asset-backed securities (ABS), or bundles of individual loans such as mortgages, car loans and credit-card debt sold on to investors, to allow banks to share the risk of default and free up funds to offer more lending.
However the ECB’s target of boosting the size of its balance sheet by 1 trillion euros (US$1.25 trillion) has made little headway through the first TLTRO or the initial covered bonds purchases.
Analysts have suggested that some banks might have preferred to hold off until after the results of the ECB’s most stringent-ever audit were published. Last week, that audit awarded a clean bill of health to a large majority of eurozone banks.
Investors on Thursday might be watchful for any comments by ECB President Mario Draghi on the possible purchase of corporate bonds following speculation this could be on the horizon.
However, Capital Economics economist Jennifer McKeown said government bond purchases — along the lines of the Fed’s program — might “ultimately be needed to ensure an expansion of the bank’s balance sheet large enough to exert meaningful upward pressure on inflation.”
Yet some ECB board members are vehemently opposed, especially Germany’s Bundesbank President Jens Weidmann.
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