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  • The ECB is expected to announce its Decision

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    The ECB is expected to announce its DecisionThe ECB monetary policy meeting is scheduled for today. This time the markets will be closely watching this event. Many investors and analysts believe that the ECB can no longer ignore the published data. Italy’s finance minister has openly asked the ECB to start prompt actions. One of the Federal Reserve representatives has recently turned to Mario Draghi and asked him to interfere.

    First of all, this refers to the inflation data. A sharp drop in the Eurozone CPI should force the ECB to consider the threat of deflation and take steps to prevent it. What steps can be taken?

    • Lowering the key interest rate to a new record low of 0.25%. This would support inflation and lower the euro exchange rate, which will also have a positive inflation effect.
    • The release of cheap liquidity into the market. Given the global financial and economic crisis, the ECB has never started quantitative easing, like the U.S. QE. Many investors would like to see something like that from Mario Draghi and his team or at least from the central bank, which is expected to introduce another round of LTRO.
    • Verbal interventions to reduce the euro rate. Mario Draghi has repeatedly reduced the single currency by declaring that the increased exchange rate has a negative impact on inflation. The ECB president may use the same technique.

    Now, let’s try to estimate the possibility of each of these decisions at today’s meeting.

    I do not expect that the key interest rate will be lowered today. The Central Bank considers that the current rate as very low and, as Ewald Nowotny, the Governor of the Bank Austria has recently admitted, the bank is unlikely to lower the rate. Anyway, this will not happen today: the European slowness will not let the bank react that quickly.

    The chances of launching QE are close to zero. Everyone knows that the ECB will never rush with such measures, while a new round of LTRO is quite possible, especially after Mr. Nowotny stated that this was welcomed.

    Meanwhile, verbal intervention is quite expected. Mario Draghi will probably declare that he cannot exclude any measures: i.e. lowering the key rate, negative deposit rates, and launching quantitative easing. However, the ECB is unlikely to hurry: most likely, the Central Bank would prefer to make sure that the drop in inflation is sustained.

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