Loose change: ECB poised for policy shift

Jun 02 2014, 05:51 IST
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SummaryBuoyed by prospect of cheaper money, markets may react sharply if Draghi doesn’t deliver

The European Central Bank will eclipse all else in economic terms this week, following heavy hints that monetary policy will be loosened in a variety of ways.

Financial markets have been buoyed by the prospect of cheaper money in the euro zone and would react sharply if the central bank does not deliver on Thursday. Its policymakers have done nothing to disabuse investors of the notion of imminent action.

Sources told Reuters earlier this month the ECB was preparing a package of policy options for its June 5 meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms (SMEs).

Action being readied includes taking the ECB's deposit rate negative for the first time — effectively charging banks to park money at the central bank in the hope they will lend it out instead.

The ECB insists it sees no threat of deflation but euro zone figures for May, due before it meets, are forecast to show inflation at just 0.7%. That is within what ECB President Mario Draghi has termed the "danger zone" below 1% for the eighth successive month.

"We are aware of the risks of a too prolonged low inflation period," Draghi told an ECB conference outside Lisbon last week, adding that he and his colleagues had to be "particularly watchful" for any negative price spiral.

At the last policy meeting in May, Draghi said the ECB was comfortable with acting in June if updated staff forecasts merited - as close as a central banker gets to a nod and a wink.

“Draghi’s May press conference raised market expectations of action, and the ECB will want to appear bold,” said Nikolaus Keis, economist at Unicredit. “The risk is that monetary conditions may quickly start tightening anew if the ECB's moves are perceived as too timid.”

What is not yet on the cards is the ECB following the Federal Reserve and Bank of England down the road of printing money.

The British central bank delivers its latest policy decision on the same day as the ECB. While it is too early for an interest rate rise, a now strong economic recovery and a housing market running hot are dismantling the consensus that no tightening is in prospect until next year.

"There are clear indications in the May minutes that some of the more hawkish MPC (Monetary Policy Committee) members are starting to get twitchy," said Howard Archer, Chief UK

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