Draghi to reveal ECB decision: Time for action, finally?
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Make a rate cut? Loosen up on lending conditions? Or do nothing at all?
For weeks, economists have been guessing away about what the European Central Bank might do at its rate-setting meeting on Thursday. Nothing new in that — only this time, they’re far from in agreement.
Some say the euro-zone’s worryingly low inflation will force the ECB to ease policy further. Others argue recent economic data have been strong enough for the Governing Council to stand pat. Add in volatility from Ukraine, and it’s all up in the air. The decision is due at 12:45 p.m. in London, or 7:45 a.m. Eastern Time, with ECB President Mario Draghi taking his seat for the press conference at 1:30 p.m.
Europe’s financial markets have been shaky in the run-up to the meeting, but that’s partly down to the Ukraine-Russia standoff out to the east. The Stoxx Europe 600 index XX:SXXP +0.51% posted its biggest daily percentage gains in eight months earlier this week, but is overall looking at a weekly decline. Meanwhile, the euro EURUSD -0.01% has slipped against the dollar and is nudging up against a small loss for the week.
This edition of the ECB meeting will offer some extra nuggets. In addition to the usual talk about the economic outlook, we’ll get updated projections from bank staff — including the first forecasts for 2016 inflation. Those estimates should show the recovery continuing to gain momentum in 2016, with inflation still below the central bank’s target of close to 2%.
And don’t forget ECB President Mario Draghi has said that by this meeting, it should have all the information it needs to decide whether to act.
So what does Draghi know now that he didn’t know last time? For one, the staff projections — and they could be critical to working out how important the low-inflation scare really is. Also, consumer-price data for February, which showed — to much surprise — that headline inflation held steady at 0.8% and core inflation crept higher to 1%. Finally, the latest composite PMI for the euro zone, which showed the economy growing at the fastest pace since June 2011.
These recent data should prompt the ECB to hold off from further easing, some economists say. Others argue that at 0.8%, headline inflation is at such a critical level, it demands some action. On Monday, International Monetary Fund boss Christine Lagarde warned that long period of low inflation could risk derailing the euro zone’s already fragile recovery. To avoid this, she urged the ECB to launch “even further accommodative policies and targeted measures.”
To some, that means a cut in the main refinancing rate. Others predict the bank will turn to unconventional measures. Reuters reported on Wednesday that the central bank is getting ready to loosen lending conditions by ending the so-called sterilization of bond purchases under the Securities Markets Program. This would effectively mean putting 175 billion euros ($250 billion) of additional funds into the euro-zone financial system, which could help drive down interbank-lending rates.
The ECB’s not the only game in town. The Bank of England also speaks up on monetary policy on Thursday, with its decision out at noon in London. Overall, economists agree nothing much will happen at this meeting and, given U.K. unemployment ticked up to 7.2% in December, any tightening at this point seems unlikely. In fact, the most interesting thing about this event is that it marks the five-year anniversary of record-low interest rates (0.5%) and the launch of quantitative easing by the BOE. Will it make it to six? Maybe we’ll find out.
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