European Central Bank “talked about QE” today – ECB press conference live

The European Central Bank keeps the benchmark rate unchanged. Draghi: “There was a discussion about QE today, it wasn’t neglected”. ECB governing council “unanimous” in its commitment to using all unconventional instruments within its mandate…


Powered by article titled “European Central Bank “talked about QE” today – ECB press conference live” was written by Graeme Wearden, for on Thursday 3rd April 2014 13.49 UTC

Here’s exactly how Mario Draghi took a pop at IMF chief Christine Lagarde, when asked to comment on her warning yesterday that the ECB should take more action (see 2.23pm)

The IMF has been of recent extremely generous in its suggestions on what we should do or not do, and we are really thankful for that.

Frankly, I would like the IMF to be as generous as they have been towards us also with other monetary policy jurisdictions, like for example issuing statements just the day before am FOMC (U.S. Federal Reserve) meeting would take place.

Dow Jones index hits fresh intraday high

Over in New York, the Dow Jones industrial average has hit a new all-time record high at the start of Wall Street trading.

The Dow is up 28 points, or 0.2%, at 16601, in early trading.

That’s the end of the ECB press conference – reaction to follow!

Another question about an ECB QE programme — Draghi agrees that there are various options in which QE could be done, (partly due to the kind of assets it would buy)

That’s why it is is really important to design a proper ABS (asset-backed securities) programme, he says.

Europe needs a proper system in which bank loans can be packaged together into high-quality assets, and sold on, he says.

And there are clearly disagreements in the governing council over how a quantitative easing programme is designed, with Draghi referring to “different preferences”.

As he puts it, it is hard to design a programme to buy private assets which is large enough to do some good, without threatening financial stability.

A well-targeted LTRO* would increase lending to the real economy, but that would have to be well-designed, says Draghi.

A badly-designed one wouldn’t help at all.

* – Long-Term Refinancing Operation — in which the ECB would offer ultra-cheap loans to banks.

Former senior ECB policy-maker Francesco Papadia isn’t convinced by Draghi’s comments on the eurozone bank stress test programme:

Interesting discussion about the output gap in the euro area – Draghi says there are still clear signs of unutilised capacity, or slack, in the economy, dragging down demand and price stability.

It took a while, but the euro has now fallen against the US dollar – down almost half a cent at $1.372.

OUCH. Mario Draghi is asked to comment on Christine Lagarde’s comments yesterday about how the eurozone needs more unconventional monetary policy.

Looking most displeased, the ECB president says he “really values” the IMF’s contribution, and adds that he hopes they can be as generous in their advice to other central banks.

Perhaps they could offer some advice the day before the Federal Reserve meets, he suggests, with his sarcasm turned up to stroppy teenager levels.

Our bank stress tests have already triggered action, even though the process isn’t finished, says Draghi.

Mario Draghi is reiterating that quantitative easing has an ‘immediate effect’ in America, because the Fed can immediately drive up asset prices (by buying Treasury bills).

The ECB, though, must work through the bank lending channel, he repeats. That’s why any QE programme must be carefully designed.

Hedge fund manager Lex van Dam agrees that an ECB-style QE programme would probably focus on bank loans:

Mario Draghi’s opening statement is online here:

Introductory statement to the press conference

Gosh - Draghi then says that his biggest fear, a protracted period of stagnation, is now “to some extent” a reality.

The ECB president doesn’t sound too happy, pointing out that many of the eurozone’s biggest problems are “structural” (and thus beyond the power of the ECB to solve)

The governing council also spent some time discussing whether to impose negative deposit rates on eurozone banks (currently they receive nothing for leaving money with the ECB)

Mario Draghi is now explaining that any eurozone QE programme would need to be carefully designed.

The governing council will “reflect hard” on what such as programme would take, he says — a sign that there isn’t agreement over how it could be done?

He is also arguing that the eurozone is not, yet, in a situation where it needs to embark on QE.

The longer inflation remains low, Draghi explains, the higher the risks.

And he also says that it’s harder for the eurozone to launch QE than for, say, the Federal Reserve. Our institutional and financial set-up is different to the US, he adds.

That might be a hint that it would buy asset-backed securities, rather than sovereign debt, suggests ECB expert Lorcan Roche Kelly.

IMF warns slow economic recovery will keep interest rates at historic lows

In a busy day for economic news, the IMF has warned that the sluggish global recovery will leave interest rates in rich countries at historic lows for several years.
In its World Economic Outlook, the Washington-based organisation said it expects rates to rise gently over the next couple of years in response to higher GDP growth, but that they will be pegged by a stuttering performance by Europe and slower growth in China.
The IMF blamed the Asian savings glut alongside a longstanding demand for safe haven assets and a lack of investment opportunities, especially in the developed world, for the persistence of low global rates.
It said that while the 2008 financial crisis had exacerbated the problem, low interest rates stretched back 30 years and many of the fundamental drivers will remain in place when the crisis is a distant memory (whenever that might be)

The story in full.

In about half an hour’s time the OECD will be releasing its latest economic surveys on the EU and Euro Area at a press conference in Brussels with Secretary-General Angel Gurria.

We’ll bring you that story once it’s ready.


Here’s the key quote from Mario Draghi, explaining how the governing council discussed the possibility of quantitative easing.

“All instruments that fall within the mandate, including QE, are intended to be part of this statement. There was, in fact, during the discussion we had today, there was a discussion of QE.”

And he also declared that all members of the governing council were “unanimous in its commitment to using all unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.”

In short: QE is ON THE TABLE, although its not clear how close the ECB is to actually taking the plunge.


Does the reference to unanimity in today’s statement imply that the ECB was not unanimous last month?

Draghi replies that the difference this month is that QE was considered — it wasn’t talked about in March’s meeting.

What would it take for you to act, if a 0.5% inflation rate isn’t enough, asks Brian Blackstone of the WSJ.

Draghi pins some of the blame for weak inflation on Easter coming particularly late this year. Easter usually pushes prices higher (as there is more demand for flights etc). So inflation should rise in April, he suggests.

Draghi is now explaining that today’s “rich discussion” also covered the possibility of lowering interest rates.

But the revelation that QE was discussed has caused a real stir:

Draghi: We talked about QE today

Onto questions, and the FT’s Claire Jones asks for clarity about the unconventional measures which the governing council is “unanimous” in committing to. Does it include a quantitative easing programme?

Draghi says that the statement says that all instruments that fall within the mandate, including QE, are on the table.

There was a discussion of QE today, he adds. It was not neglected, in what was a “rich discussion”, says Draghi.

That feels like an important development — given the ongoing uncertainty over whether the ECB could launch a bond-buying programme without violating its mandate.


The statement ends with Draghi’s traditional call to eurozone government to continue their economic reforms. He also urges them to liberalise their labour markets to boost employment.

There has been significant progress in improving bank funding conditions since Summer 2012, Draghi continues, but more needs to be done.

Draghi also pledges to closely monitor the repercussions from geopolitical risks & exchange rate risks.

The risks to economic growth are on the downside, Draghi says.

But the governing council sees the risks to inflation and deflation as limited, and broadly balanced.

If Draghi is trying to talk the euro down, he’ll have to talk try harder — it is actually a little higher now at $1.378.

Draghi adds that the ECB’s governing council was “unanimous” in its commitment to using all unconventional instruments within its mandate to cope with the risk of low inflation becoming entrenched.

Draghi: ECB does not exclude further monetary policy easing

Draghi is taking a dovish line, saying that the ECB will consider all available instruments at its disposal.

We are resolute in our determination to maintain a high degree of accommodative monetary policy, he says.

We do not exclude further monetary policy easing, he adds, and “firmly reiterates” the ECB’s forward guidance that interest rates will remain at their current levels, or lower, for an extended period.


Draghi begins by explaining that today’s meeting was attended by Olli Rehn.

The moderate recovery in the eurozone is continuing, Draghi says, but the ECB also sees a prolonged period of low inflation before gradually rising.


The press conference is underway, after the cameramen have taken a flurry of photos of Draghi and his vice-president, Vitor Constancio.

Draghi will start by reading a prepared statement (which will then be published online), and then take questions from the Frankfurt press pack.

Nearly time for Mario Draghi’s press conference.

It will be streamed live here.

I’ll cover the key points, and reaction from the City and social media (often the best element of an ECB presser)

If an inflation rate of just 0.5% doesn’t prompt the ECB into action, what will, asks the WSJ’s Paul Hannon:

Here’s Associated Press’s take on the ECB’s decision not to cut interest rates today, by Jurgen Baetz.


ECB leaves rates on hold despite inflation worries

The European Central Bank left its main interest rate unchanged Thursday despite evidence that the economy of the 18-country eurozone is weak, with inflation continuing to fall and unemployment stuck near a record high.

The ECB’s decision to leave the rate at a record-low 0.25 percent is certain to prompt questions about whether it might soon resort to less conventional measures to boost the economy, such as a new round of cheap loans to banks or large-scale purchases of financial assets, as the U.S. Federal Reserve has done.

President Mario Draghi is set to discuss the ECB governing council’s policy decision later Thursday, and investors will be watching for any hints of future action.

Data released on Monday showed the annual inflation rate across the eurozone dropped to 0.5 percent in March down from 0.7 percent in February. The decline the third in as many months underlined concerns that consumer prices could start to fall outright, starting a so-called deflation.

That risks creating a situation in which consumers and businesses put off purchases in hopes of better deals down the line and companies cut prices to entice buyers. Such a downward spiral chokes off economic growth and can be difficult to get out of Japan was stuck in deflation for two decades.

The ECB has said the eurozone is experiencing a “protracted period of low inflation” but dismisses fears of an outright deflation.

Unemployment, meanwhile, remains stuck near a record-high of around 12 percent following years of economic and financial upheaval. In the countries hardest-hit by the crisis like Greece and Spain, more than one in four people are still jobless.

Besides having a social cost, high unemployment also weighs on consumption and the wider economy. The EU predicts the eurozone will grow 1.1 percent this year. While that would be the bloc’s best performance since 2011, it would still pale in comparison to the U.S. economy, which is expected to grow around 3 percent.

This week’s new dip in inflation came at a time when the euro has been buoyant in foreign exchange markets. But a higher currency can push inflation further down in two ways: It can make imports cheaper and weigh on economic activity by making exports more expensive on international markets.

The prospect of a looming deflation, meanwhile, is especially worrisome for those eurozone nations already unable to support growth because of their overly high debt burden. That’s because when prices fall, it becomes harder to service debts, which are fixed in nominal terms.

Among the possibilities the ECB might be considering in the near future, analysts say, might be large-scale purchases of financial assets such as government bonds with newly created money, as the U.S. Federal Reserve has done.

That would increase the amount of money in the economy and aim to lower market interest rates and stoke inflation. But such a move faces legal, political and technical obstacles.

Besides offering a new round of cheap loans to banks, the ECB could also trim its deposit rate below zero, effectively penalizing banks for holding money at the ECB instead of lending it out in the economy.


Anyone for Draghi bingo?

Bloomberg’s Jonathan Ferro reckons Mario Draghi might adopt a new dovish plumage at today’s press conference, to talk the euro down a bit.

There’s hardly any reaction on the FX markets, where the euro inched up just 0.02% to $1.377, from $1.3765 beforehand.

That shows the market was pricing in a very small chance of rates being cut.

So, despite inflation falling to just 0.5% in January, the European Central Bank’s governing council has resisted launching fresh measures to stimulate growth and drive prices up.

It has voted to:

  • leave the headline borrowing rate unchanged at 0.25%;
  • leave the marginal lending facility (charged on banks who borrow from the ECB) at 0.75%;
  • leave the deposit facility (paid to banks who deposit with the ECB) unchanged at 0.0%

Now it’s up to Mario Draghi to justify this inaction, at a press conference in 40 minutes.

European Central Bank leaves interest rates unchanged.

Breaking: The European Central Bank has voted to leave its main interest rates unchanged at their current record lows.

The euro has been stable today, currently trading at $1.3765 against the US dollar.

ECB watchers are doing their best to build the tension up…. Just 2 minutes now….

Just five minutes until the European Central Bank’s decision on monetary policy is announced….

Speaking of Spain, the Madrid Treasury held a successful debt auction this morning — raising almost €5.6bn at lower yields (interest rates). This included €1.6bn of 10-year debt, at a yields of just 3.29%.

Ishaq Siddiqi of ETX Capital reckons “the worst of the crisis” is over in Spain:

Moreover, it’s a fine example of a ‘peripheral’ country implementing structural reforms, initiatives and austerity to stimulate growth better than Italy, Greece and Portugal.

Furthermore, Spain just sold a total of EUR5.58b of bonds in an auction which we well-bid with ample demand, confirming the upbeat picture surrounding investor appetite for Spanish debt – it’s hard not to be inspired by Spain’s progress.

Spain’s stock market is outpacing the rest of Europe.

The IBEX has gained 0.8% today, as Madrid traders welcome the news this morning that the Spanish service sector grew at a faster pace last month (see this morning’s blogpost for the details)

Just under forty-five minutes until the European Central Bank announces the result of today’s governing council meeting.

Economists still don’t expect any new measures from the ECB, despite inflation hitting just 0.5% last month.

Peter Dixon at Commerzbank explains that the Bank will hope that prices will now pick up this month:

“The ECB is primarily concerned about what is happening with inflation, and yes we have too little for the ECB’s comfort.

“But I think they want to see if the most recent set of numbers marks a trough before acting further.”

The Bank of England has also released correspondence with prisoners who were incarcerated in the 18th and 19th century for the crime of forging banknotes.

It includes details of how the Bank actually provided some funds to convicts in places like Newgate Gaol, particularly women and their children, who could be transported rather than executed if they agreed to a plea bargain.

For example:

Johanna McCarthy writes on 8 April 1818 from the Maria ship at Deptford that ‘I am quite destitute of money and friends and have been confined in Newgate Bristol 13 months’.

The Committee for Lawsuits records that McCarthy and two other female convicts who were ‘on the point of sailing to Botany Bay’ be paid £5 each by the Solicitor in response to their pleas for relief.

The full details are here, in the BoE archive.


This is rather neat – the Bank of England has released a swathe of new documents from its archive.

It includes a photo gallery on Flickr, of photos going back over a century. Worth a look.


Willem Buiter, Citigroup’s chief economist, reckons the European Central Bank won’t take action today, but Mario Draghi may express concern over the strength of the euro:

Europe’s stock markets are treading water ahead of the ECB decision and press conference.

The news overnight of a new mini-stimulus package in China has not sparked a rally (Beijing is putting more money into railway construction, and offering new tax breaks to small firms)

  • FTSE 100: down 5 points at 6653, -0.1%
  • German DAX: down 4 points at 9618, -0.05%
  • French CAC: down 3 points at 4427, – 0.1%

Traders are also waiting for tomorrow’s US jobs data.

Will Hedden of IG says that market sentiment is “difficult to gauge, much like the London skyline through the morning’s smog”:

Macro event positioning, which is a clever way of saying doing nothing ahead of the European Central Bank meeting and non-farms, is the order of the day.

Scribes at UBS have boosted Tullow Oil (4%) to the top of the index this morning by upgrading them to buy, and the market likes B&Q owner Kingfisher’s (+2%) spot of cross-channel shopping as they pick up a controlling stake in French DIY chain Mr Bricolage.

We’ve also seen an IPO in London this morning, with online technology service Just Eat floating:

Just Eat shares rise on stock market debut

Retail sales across the eurozone rose 0.4% last month, according to Eurostat, which may calm some fears over the state of Europe’s economy.

The stats body reports that the retail sales in the non-food sector rose 0.8%, and there was a 0.3% increase in “Food, drinks and tobacco”. Automotive fuel sales fell by 0.8%.

The figures strip out inflation (or deflation, in some countries), and may show that consumers are feeling a little more confident. However, it’s hardly a strong reading.

IHS’s Howard Archer comments:

February’s further growth in retail sales boosts hopes that consumers are perking up and can help Eurozone growth to firm.

It may also take some pressure off the ECB to take fresh action today — rising retail sales do not suggest that consumers expect deflation to take hold (as they’d probably hold back purchases until prices have dropped)

(well, February, but Simon’s point stands)

On an annual basis, the retail sales index increased by 0.8% in the euro area and by 1.5% in the wider EU.

Here’s some detail from eurostat:

The highest [monthly] increases in total retail trade were registered in Malta (+1.9%), Denmark, Romania and the United Kingdom (all +1.4%) and Germany (+1.3%), and the largest decreases in Estonia (-3.4%), Poland (-1.5%), Slovenia and Finland (both -1.4%).


Andrew Tyrie also asked George Osborne about the Financial Services Authority, and the botched way it pre-briefed its inquiry into the life insurance industry last week.

The chancellor said that we must expect the FCA to abide to the same high standards of regulation as the rest of the City.

Tyrie (who is deeply worried about the incident) hammered home the point that the inquiry into the UK financial watchdog must be fully independent. Why has the Treasury said it wants to ‘discuss’ the conclusions as they come out?

Osborne says the inquiry will be independent, but the Treasury wants to ensure markets are working properly. More with Andy Sparrow’s liveblog from Parliament.


Heads-up: Chancellor George Osborne is appearing before the Treasury committee to discuss last month’s Budget.

Here’s the livefeed.

It began with chairman Andrew Tyrie asking whether this year’s Budget had been better received this year, because it wasn’t leaked this time.

Osborne replied that he wasn’t responsible for leaks in previous years (mentioning the Evening Standard’s accidental tweeting of its front page too early in 2013).

And after last year’s experience, he ended the practice of pre-releasing of budget information to the media.

Andrew Sparrow is live-blogging it here:


And here’s the chart showing how new orders into Britain’s service sector dropped last month:

UK service sector growth hits nine-month low

Just in – growth in the UK service sector has fallen to its lowest rate since last June, but is still fairly robust.

Markit’s UK Services PMI, based on data from thousands of firms across the country, dropped to 57.6, from 58.2 in February.

Any reading above 50 shows growth, and this graph shows how activity spiked last summer as Britain’s recovery got under way.

Companies reported a slowdown in the growth in new order, and also hired fewer new employees.

But they remain confident about future prospects.

David Noble, CEO at the Chartered Institute of Purchasing & Supply, reckons the UK services sector – a dominant part of the economy – is stabilising:

“As a whole, we may be seeing a slight downward trend at the start of this year, but we are hopeful that this healthy outlook is where we are now heading.”

The full report is here.

The pound has dropped a little, losing 0.17 cents against the US dollar to $1.661.

Chris Williamson, chief economist at Markit, said this week’s data shows the UK economy continued to grow steadily last month:

“While March saw growth slow across the services, manufacturing and construction sectors, all three continue to expand at very strong rates, meaning the economy looks to have grown by at least 0.7% again in the first quarter.

Eurozone firms keep slashing prices, as growth slows in March

Growth across the eurozone private sector slowed a little in March and firms kept slashing prices in a bid to drive demand – adding to already weak inflation in the euro area.

Markit’s ‘Composite PMI’, based on this morning’s service sector data and manufacturing reports early this week, fell to 53.1 from 53.3 a month earlier.

Markit reported that Ireland and France’s private sectors both posted their best monthly growth in several years, while Germany and Italy both saw weaker growth:

Nations ranked by all-sector output growth

Ireland: 59.0 – 85-month high

Germany: 54.3 – five-month low

Spain: 54.2 – two-month high

France: 51.8 – thirty-one month high

Italy: 51.1 – three-month low

Markit said the report was consistent with eurozone GDP rising by 0.5% in the first three months of 2014, which would be an improvement on the previous quarter’s 0.3% expansion.

The good news was that new orders rose in March, meaning a slight increase in the backlog of work.

The bad news is that firms kept cutting the prices they charge — meaning output charges have declined for the last two years. Input cost inflation fell to an eight-month low, which is another nudge to the ECB to take fresh action at today’s policy meeting.

Chris Williamson, chief economist at Markit, said the ECB should be worried:

Prices charged by manufacturers fell for the first time in seven months and charges levied for services were cut at a stronger rate, having fallen continually over the past 28 months.

“The weakening price indices will stoke fears that deflationary forces are intensifying amid weak demand and near-record unemployment. But the survey responses also show that companies are pricing more aggressively, having become leaner and more productive – which bodes well for competitiveness.”


That German service sector PMI reading is someway below expectations….

But growth in Germany’s services sector slowed in March, with its Services PMI falling to 53.0 from 56.4 in February. That’s still comfortably in ‘expansion’ territory (>50).

France’s services sector has reported its strongest growth in over two years, with its Services PMI jumping to 51.5, from 47.2 in February.

Bad news from Italy - activity in its service sector shrank last month, as firms failed to maintain the momentum recorded in February.

The Italian service sector PMI fell to 49.5 in March, from 52.9 – which indicates a small fall in activity (50 is the cut-off point between growth and contraction).

Data firm Markit found that new business growth slowed and firms kept cutting their workforce. Prices also kept falling, but at a lower rate than last month. On the upside, firms are more confidence about future prospects.

Economist Phil Smith said:

Unlike in manufacturing, where a recovery is now in full flow, the service sector looks to be stuck in a low gear with subdued domestic demand still weighing on activity.

Confidence among consumers and businesses alike is finally being restored, however, a factor which may help stimulate growth going forward.

Spain’s service sector grows again, but jobs keep being cut

Spain’s service sector has grown for the fifth month in a row, but firms are cutting jobs, according to Markit’s monthly survey of purchasing managers across the country.

The Spanish Services PMI rose to 54.0 in March, up from 53.7, as the recovery in Spain’s services sector continues.

Markit reports a “slight acceleration” in the growth of activity and new orders. Encouragingly, business sentiment hit its highest level in almost seven years, as firms try to put the pain of Spain’s recent recession behind it.

However, firms are cutting prices to drive demand — in another warning signal for the ECB. Markit said:

A further solid reduction in prices charged was recorded as companies reacted to strong competition and pressure from clients for discounts.

And employment fell for the second month running in March, after rising in January. More here.

Bank of England governor Mark Carney has refused to rule out raising interest rates ahead of next May’s general election, in a trip to Durham.

Carney told The Northern Echo that hiking borrowing costs from their current record lows would show that the UK economy had improved.

Asked if he would rule out a rise before next Spring’s election, he said: “No, absolutely not.

He conceded that borrowers wouldn’t applaud an interest rate rise:

“When you raise interest rates it is a welcome sign. I share my colleague Charlie Bean’s view that it is confirmation the economy is recovering after some very difficult years.

“I’m not sure we will get a lot of cards or letters to thank us, but we will do it when it needs to happen.

Here’s our take: Mark Carney won’t rule out pre-election interest rate rise

There’s a broad consensus that the ECB is unlikely to take action today, even though inflation is at a four-year low.

Reuters reports:

Policymakers have been willing in recent weeks to publicly broach cutting deposit rates below zero – effectively charging banks to hold cash with the ECB – or embarking on bond purchases as the United States, Japan and Britain have.

A straightforward cut in the ECB’s main refinancing rate to 0.1 percent from 0.25 percent – or more complex changes to existing market programmes – are other possibilities.

But there has been little sense that a majority of officials favours imminent use of any of those tools even though inflation has been below 1 percent for six months. Instead most may prefer to keep such policies on standby in case of an external economic shock.

“Policy rhetoric should lean in the direction of dovish. But it is unlikely that current economic and market conditions meet the watermark for ECB action,” said Lena Komileva, managing director of G+ Economics.

Matt Boesler of Business Insider agrees:

Many believe persistent low inflation will force the ECB to ease further this year, but only three of the 57 economists polled by Bloomberg expect such an announcement to come out of Thursday’s meeting.

And do check out Ambrose Evans-Pritchard in the Telegraph. He warns that the ECB’s “spectacular idiocy” in not fighting falling inflation is driving Italy, France and Spain into perilous debt traps, undermining the progress made in lowering their deficits.

Here’s a flavour:

Laurence Boone and Ruben Segura-Cayuela, from Bank of America, say their “inflation surprise” index keeps ratcheting lower as one shock after another hits the eurozone, while their gauge of “deflation vulnerability” has been flashing red for most EMU countries.

The effect is deeply corrosive even if the region never crosses the line into technical deflation. “Lowflation” near 0.5pc can play havoc with debt trajectories if it goes on for long, ultimately throwing Europe back into a debt crisis. “The biggest threat to public debt dynamics is weaker-than-expected inflation. Merely lower than expected inflation, not even deflation, would lead to a significant deterioration in countries’ public finances,” they said.

The bank said lingering “lowflation” would cause debt ratios to surge by 2018, rising 10 percentage points in France to 105pc of GDP, 15 points in Italy to 148pc and 24 points to 118pc in Spain.


Also coming up today….

ECB meets today under shadow of deflation

Good morning, and welcome to our rolling coverage of the financial markets, the world economy, the eurozone and business.

The European Central Bank’s governing council holds its monthly meeting today, as the spectre of deflation continues to loom over the euro area.

With inflation across the euro area dropping to just 0.5% last month, and prices actually falling in several countries, the governing council is under renewed pressure to act.

They also have the stern words of Christine Lagarde ringing in their ears. Yesterday, the IMF chief warned that the risk of “a prolonged period of low inflation, particularly in the eurozone” was a key threat to global stability.

Lagarde insisted that:

More monetary easing, including through unconventional measures, is needed in the euro area to raise the prospects of achieving the ECB’s price stability objective.

The ECB does have several tools at its disposal (as president Mario Draghi often points out):

  • It could cut its headline interest rates again (which would mean banks were charged negative rates for leaving money with the ECB)
  • It could stop ‘sterilising’ bond purchases made during the height of the eurozone crisis, which would inject more liquidity into the system
  • It could develop a new programme to drive lending to small eurozone firms
  • And, potentially, it could launch a QE-style stimulus programme – last week, the head of the Bundesbank appeared to soften Germany’s opposition to this.

But despite fears that eurozone is sliding into a Japan-style lost decade, few analysts believe the ECB will take action today. As Nordea Markets analyst Aurelija Augulyte tweets:

Why not? Well, the ECB’s own forecasts predict that inflation will return close to target by 2016. Falling energy prices are one main factor pushing prices down (although not the only one). And it is keen to see the results of this autumn’s bank stress tests, which will weed out failing institutions.

Draghi will also get the chance to talk down the euro when he faces the press pack after the decision is announced. The single currency is uncomfortably high at $1.376 to the US dollar – and could push higher if traders conclude that the ECB will keep sitting on its hands.

Michael Hewson of CMC Markets agrees that little action is expected today:

The consensus still remains for rates to remain on hold, but it is slowly shifting to some form of action with some predicting a cut of 0.15% in the headline rate and a negative deposit rate. This still seems unlikely at this stage, and even if implemented would have little lasting effect after the surprise factor had been digested.

On the subject of a negative deposit rate, the implementation of such a measure could well do far more harm than good, particularly with so many European banks already struggling for profitability and looking to build up their balance sheets in preparation for the upcoming “Asset Quality Review” so that they can pass the ECB mandated stress tests due later this year.

The ECB decision is announced at 12.45pm BST (or 1.45pm CET), with a press conference 45 minutes later.

I’ll be tracking all the main action through the day…. © Guardian News & Media Limited 2010

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