Last updated: August 7, 2014 8:16 am

ECB expected to hold interest rates

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©Bloomberg

Investors’ focus on Thursday is on the European Central Bank, which is expected to keep interest rates on hold at its monetary policy vote, deflecting calls for more action to boost the eurozone’s anaemic recovery and tackle the threat of a crippling bout of deflation.

The ECB will on Thursday almost certainly keep its main refinancing rate at its record low of 0.15 per cent and its deposit rate in negative territory, charging banks 0.1 per cent on a portion of their reserves parked at the bank.

Policy makers are not expected to embark on broad-based asset purchases just yet, despite news that Italy, the eurozone’s third-largest economy, slipped back into recession and German factory orders fell by the most in more than two years on the back of the crisis in Ukraine.

Most economists believe signs of weak growth and a fall in inflation to a fresh four-and-a-half year low will prove insufficient to persuade the bulk of the governing council to act. But investors will be watching for the tone of ECB President Mario Draghi’s remarks at the press conference that follows the policy decision, amid the recent downbeat data and geo-political tensions over Ukraine.

Analysts think officials will want to gauge the impact of a package of measures unveiled in June at least until the end of this year before deciding whether conditions in the eurozone are bad enough to warrant quantitative easing.

The central bank’s likely pause will disappoint François Hollande, who urged policy makers to boost the region’s recovery and fight what the French president said was a “real deflationary risk” in the eurozone. “The ECB must take all necessary measures to inject liquidity in the economy,” Mr Hollande told Le Monde, a French newspaper, earlier this week.

Inflation fell to 0.4 per cent last month, which leaves the measure at less than a quarter of the central bank’s target of below but close to 2 per cent. The fall has raised concern that trust in the ECB to maintain inflation close to target will be damaged.

Ken Wattret, economist at BNP Paribas, said: “When inflation is so close to zero, should you not worry that inflation expectations will become unanchored?”

In June, the ECB raided its policy toolkit of everything except broad-based government bond buying to rid the region of the threat of a vicious spell of falling prices.

Mr Wattret added: “By doing everything bar QE, the ECB has taken the second best option. The measures it has taken will ease monetary conditions. But they’re incremental when what you need is a major positive shock.”

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