AFP, Frankfurt :
Financial markets are betting on an interest rate cut from the European Central Bank next week as low inflation, the strong euro and anaemic credit finally spur it into action.
The ECB has held its key interest rates steady at their current all-time lows since November, repeatedly promising to act if necessary to avert deflation in the 18 countries that share the euro.
Inflation is still way below the ECB’s target of 2.0 percent and shows little sign of picking up any time soon.
Hence, ECB president Mario Draghi more or less pre-announced a move at the bank’s last policy meeting, saying the central bank’s decision-making governing council was “dissatisfied” with the current path of inflation and was “not prepared to accept it as a fact of nature.”
But the precise method and extent of any monetary easing would depend on the ECB’s updated inflation forecasts, scheduled for next week, Draghi said.
“I would be very surprised if nothing happens” at the meeting on Thursday, UniCredit economist Marco Valli told AFP. “The markets would not take it very well.” Capital Economics economist Jennifer McKeown agreed.
“It would be a shock if the ECB failed to act this month,” she said.
“Economic conditions in the eurozone certainly justify strong action, especially inflation persistently below 1.0 percent since October,” said IHS Global Insight analyst Howard Archer.
“And if the ECB fails to deliver having built up expectations, it risks upsetting the markets and also denting its credibility.”
A range of data last week backed up the need to act.
Area-wide growth came in at a disappointingly meagre 0.2 percent. Money supply growth-which the ECB uses as a guide to future inflation-was anaemic. And loans to the private sector, hitherto the stumbling block to a more sustained recovery, continued to fall.
These were all reasons to act, said Archer.
The biggest headache for the ECB is the threat of deflation.
Eurozone inflation picked up only marginally to 0.7 percent in April, well below the 2.0 percent that the ECB defines as being in line with price stability.
In a period of deflation, when consumer prices fall for a broad range of items over a sustained period, people and businesses tend to postpone purchases while hoping for further price declines in the future.
Deflation can thus push an economy into a vicious spiral of falling growth and rising unemployment, and it is notoriously difficult to reverse. Commerzbank economist Michael Schubert said it was time for the the ECB to follow up words with action.
