Monday, December 22, 2014   

Low inflation may lead ECB to cut rate
(02-06 14:19)

The European Central Bank sits down to its regular monthly policy meeting Thursday amid speculation that weaker-than-expected eurozone inflation data could prompt a cut in interest rates.
Data compiled by the EU's statistics agency Eurostat last week showed that eurozone inflation slowed to 0.7 percent in January from 0.8 percent in December, way below the ECB's target of just below 2.0 percent, AFP reports.
The phenomenon is known as disinflation, as opposed to deflation when prices fall in real terms.
The ECB has repeatedly stated it sees no deflationary threat at present, but central bank watchers believe it could become a very real danger if inflation slows much further.
"The disinflation surprise has further fuelled market expectations for more ECB easing, in line with our view,'' said Commerzbank economist Rainer Guntermann.
At last month's meeting, ECB president Mario Draghi expressly stated that the central bank was ready to take further action if necessary.
It already pared back its central "refi'' refinancing rate to a new all-time low of 0.25 percent in November.
But ECB watchers reckon the central bank could wait a bit longer before cutting borrowing costs again.
"The surprisingly soft numbers for January inflation make the outcome of meeting a close call,'' said UniCredit economist Marco Valli.
But he added: "We still expect interest rates to be left unchanged and no new unconventional measures, in line with consensus. But the risk of immediate action has risen.''
ING DiBa economist Carsten Brzeski similarly believed that "developments over recent weeks have provided both evidence for and against further monetary policy action this week.''
The meeting "will not be an easy one,'' Brzeski said, noting that "strong confidence indicators and a continuation of the gradual recovery argue against more action.''
Commerzbank's Guntermann agreed.
"We do not categorically want to rule out action as early as this week but judging by recent comments from ECB members, we think that action is premature,'' he said.
The ECB's governing council could hold fire until projections in March for growth and inflation, the expert suggested.
These "will give the council a better understanding about the required stimulus. Indeed while the ECB will inevitably have to revise its inflation forecasts lower it could lift its growth forecast at the same time.
"The caveat is still the dichotomy between the soft and the hard data,'' Guntermann concluded.
But Capital Economics economist Jonathan Loynes believed another rate cut could be on the cards.
The ECB's decision-making governing council "will need to follow up Draghi's dovish words with further policy action very soon. Another small cut in interest rates, perhaps accompanied by a negative deposit rate, seems the most likely course of action, if not at February's meeting then soon after,'' Loynes said.
The ECB's so-called deposit rate currently stands at zero percent and there has been much debate whether the central bank would bring it down into negative territory, an unprecedented move that could have unforeseen repercussions.   
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