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June 25, 2017

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ECB to hold fire on rates, could make move in June

FRANKFURT--The European Central Bank is not expected to cut interest rates this week, but could start paving the way for a possible move in June if deflationary dangers persist, analysts said.

The ECB has held eurozone borrowing costs at their current all-time low of 0.25 percent since November.

Last month, the bank's president Mario Draghi insisted that "we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time."

Nevertheless, no monetary easing appears to be on the cards at the bank's next meeting on Thursday — this time being held in Brussels — central bank watchers said.

At the moment, deflation is perceived to be the biggest threat to the eurozone's economic recovery.

Deflation is a general decline in prices and can be highly damaging if consumers, expecting prices to fall further, hold off purchases.

Last month, area-wide inflation picked up slightly, but still fell short of forecasts and was way below the ECB's target of just below 2.0 percent.

Consumer price inflation rose to a 0.7-percent rate in April, up from the 0.5-percent in March, which was the lowest since October 2009.

UniCredit analyst Marco Valli said that inflation had come in below ECB expectations for the past two months.

"But the extent of this weakness and its composition — mostly skewed towards non-core components — is unlikely to trigger central bank action in May," Valli said.

Still, action "appears more likely than not" in June, the expert continued.

The ECB is scheduled to publish its latest economic forecasts on Thursday and it may be compelled to downgrade its inflation forecasts.

"Remaining completely inactive in this context may damage its credibility," Valli believed.

Jennifer McKeown at Capital Economics agreed.

Dovish Tone Expected

"We doubt that recent events and data releases have been significant enough to ensure more policy action from the ECB at its May meeting. But developments in the inflation outlook and in money markets suggest that the bank's two 'contingencies' for further action might soon be met," McKeown said.

"We expect a very dovish tone from Draghi to hint that such action might be taken at the June meeting. This could involve an interest rate cut together with more long-term loans to banks or even a program of asset purchases," the analyst added.

In addition to cutting its interest rates, the ECB could ease monetary conditions by pumping money into the system or buy up government bonds to bring down borrowing costs.

ECB officials have repeatedly said they see no threat of deflation, but at the last few meetings president Draghi has always insisted that the central bank stood ready to act if necessary.

Nevertheless, analysts believe the ECB's hand will not be forced just yet.

"Our analysis of the various options suggests that the ECB is likely to keep its powder dry on Thursday," said Commerzbank economist Michael Schubert.

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