For the first time in a while, people are talking about a European Central Bank policy decision.
The consensus forecast on Wall Street is that the ECB will maintain its benchmark refinancing rate at 0.50%, where it’s been since May.
Yet with a persistently appreciating euro and the release of data last week revealing that eurozone consumer price inflation plunged to an all-time low of 0.7% year over year in October from 1.1% in September, a few notable firms (BofA Merrill Lynch, UBS, and RBS) predict the ECB will cut the refi rate to 0.25% Thursday, while a few others (Morgan Stanley and Société Générale, to name two) think it will do so at its December meeting.
“We believe that the ECB will cut the refi rate by 25 basis points at [the November] meeting, not so much because of concerns over falling inflation — which will likely stabilise in the course of 2014 – but rather to advocate the view that it is still able to (re)act,” writes BofAML economist Laurence Boone in a preview of the decision. “Indeed, the ECB has been reluctant to address the deteriorating inflation outlook for a while, and the EONIA curve has steepened on the back of ECB’s forward guidance discussion, suggesting the efficacy of forward guidance is limited. By cutting the refi, the ECB will underline that it is vigilant.”
While inflation is low — and unemployment is high — recent survey data point to a modest economic recovery in the eurozone, which may ease any pressure on the ECB to make changes to interest rates at this stage.
Furthermore, the central bank will publish updated macroeconomic forecasts at its December meeting, so if a rate cut is in the cards, it may make more sense to wait one more month.
Regardless of what happens with the refi rate, though, market participants will be listening closely to what ECB president Mario Draghi has to say about recent euro appreciation, which could become a headwind to the nascent economic recovery currently underway.
“We expect Draghi to deflect the exchange rate’s relevance via its impact on inflation forecasts,” say Deutsche Bank economists Mark Wall and Gilles Moec. “This will be seen as adding to the risk of low inflation — in reality the incremental impact is small — but it might well be the ECB strategy to use the fear of lower inflation to strengthen the credibility of forward guidance. By ensuring well-behaved market interest rate expectations, the ECB may hope to ensure a well-behaved FX market and reduce the risk of a currency overshoot.”
The ECB announces its decision on interest rates Thursday at 7:45 AM ET, followed by a press conference and Q&A with Mario Draghi at 8:30. Follow it all LIVE on Business Insider »
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