Thursday, at 9:45pm AEDT, the European Central Bank will announce its latest policy decision. At 10:30pm, ECB president Mario Draghi will hold his monthly press conference.
62 of the 66 market economists polled by Bloomberg is that the ECB will leave its benchmark refinancing rate unchanged at 0.25%. Four of those economists, however — from BNP Paribas, Barclays, Danske Bank, and RBS — predict the ECB could reduce this rate by 15 basis points to 0.10%.
Many are concerned about disinflation in the eurozone — the latest data released last week revealed an unexpected drop in year-on-year inflation to 0.7% — but cutting rates to combat it probably isn’t worthwhile.
“It is hard to make an argument for the decidedly marginal improvement that a 0.1-0.15 percentage point change would make,” says Lorcan Roche Kelly, a strategist at Agenda Research.
“It also would do very little to improve the one short-term problem the ECB is more likely to be worried about — liquidity.”
The ECB could do a few things to improve excess liquidity in the system, like reducing banks’ reserve requirements or ceasing to sterilize the bond purchases it makes under its SMP program.
Martin Enlund, a senior fixed income and foreign exchange strategist at Handelsbanken Capital Markets, believes additional measures such as these are unlikely to be announced this month.
“We think the market is going to far in expecting a super-soft (mushy?) ECB,” says Enlund.
“The macro situation is not as clear-cut, and dreary, as commonly believed. The ECB could easily take a wait-and-see stance: 1) Fed tapering and rate hikes will eventually trigger a weaker EUR; 2) the V-shaped recovery in household sentiment suggests rapid improvement in consumption growth (from -1.5% yoy to +1.5% yoy) as well as an upturn in inflation to 1.6% by early 2015; 3) IFO suggests German GDP growth at 4% later this year; while 4) PMI composite are at levels where the ECB has never cut rates.”
Kelly believes the ECB will refrain from announcing anything new Thursday as well.
“At the moment there just isn’t enough crisis for even Draghi to act,” says Kelly.
“He is likely to talk about options for increasing liquidity tomorrow — he certainly will be questioned on them — but we feel he will wait a little longer before acting.”
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