Sunday, December 10, 2023
Homecentral banksECB unlikely to surprise, but deflation concerns grow

ECB unlikely to surprise, but deflation concerns grow

The European Central Bank (ECB) is not expected to deploy its "powerful artillery" after Thursday's policy meeting, but economists warn that calls for more action are likely to build, especially given concerns about low inflation and lending.

Economists do not see ECB President Mario Draghi announcing any further rate cuts or stimulus measures, and expect Draghi to adopt a balanced tone at the press conference following the rate decision.

Draghi himself has played down expectations of action at Thursday's meeting, telling German magazine Spiegel that "We don't see a need for any urgent action."

(Read more: ECB'S Draghi sees no urgent need to cut rates further)

Hannelore Foerster | Getty Images

Thursday's meeting comes after the ECB surprised markets in November by cutting its main interest rate to 0.25 percent from 0.5 percent. However, it took no further action in December.

Daiwa Capital Market's Chris Scicluna stressed that little of significance had happened since the ECB met in December, despite the U.S. Federal Reserve's long-anticipated announcement that it would start tapering its bond-purchasing program. He forecast the latest ECB meeting would be, "A low-key affair, with no substantive news on policy and little change to the tone of Draghi's language".

Nicholas Spiro, managing director of Spiro Sovereign Strategy, added that next week, Draghi would "Do what he does best".

"Strike a dovish tone, insist that the ECB still has a 'strong artillery' of policy instruments at its disposal, yet refrain from undertaking further policy action for the time being," Spiro told CNBC.

Lending concerns?

The central bank's case for inaction centers on the signs of a fledgling economic recovery in the euro zone, after its emergence from recession last year.

Recent data point to a gradually improving economic picture. On Monday, Markit's PMI (purchasing managers' index) showed service sector and manufacturing activity in the euro zone expanded once again in December, and at a faster rate than in the previous month.

Meanwhile, data on Wednesday showed euro zone unemployment stabilized in November, albeit at a record high of 12.1 percent. This stabilization has led some economists, including James Howat, European economist at Capital Economics, to conclude the region's labor market downturn is starting to ease.

(Read more: Euro zone manufacturing grows; France stumbles on)


Most Popular