Financial markets are betting on an interest rate cut from the European Central Bank (ECB) this week as low inflation, the strong euro and anemic credit spur it into action.
The central bank has held its key interest rates steady at their current all-time lows since November last year, repeatedly promising to act if necessary to avert deflation in the 18 countries that use the euro.
Inflation is still way below the bank’s target of 2 percent and shows little sign of rising any time soon.
Photo: Bloomberg
Given this, ECB President Mario Draghi more or less pre-announced a move at the bank’s last policy meeting, saying that its decisionmaking Governing Council was “dissatisfied” with the current path of inflation and was “not prepared to accept it as a fact of nature.”
Yet the precise method and extent of any monetary easing would depend on the ECB’s updated inflation forecasts, set to be released this week, Draghi said.
“I would be very surprised if nothing happens” at the meeting on Thursday, UniCredit Group economist Marco Valli said. “The markets would not take it very well.”
Capital Economics economist Jennifer McKeown agreed, saying: “It would be a shock if the ECB failed to act this month,” while IHS Global Insight analyst Howard Archer added: “Economic conditions in the eurozone certainly justify strong action.”
A range of data a week ago backed up the need to act, revealing eurozone growth was at a disappointingly meager 0.2 percent, while money supply growth — which the central bank uses as a guide to future inflation — was anemic and loans to the private sector that were hitherto the stumbling block to a more sustained recovery kept falling.
Archer said that these were all reasons to act, yet the biggest headache for the financial authority is the threat of deflation.
Eurozone inflation picked up only marginally to 0.7 percent in April, well below the 2 percent that the ECB defines as being in line with price stability.
In a period of deflation, people and businesses tend to postpone purchases, which can push an economy into a spiral of falling growth and rising unemployment.
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