ECB to hold fire on rates despite slow inflation

April 3, 2014
The Eurozone logo/AFP
The Eurozone logo/AFP

, FRANKFURT, April 3- The European Central Bank is not expected to cut its key interest rates on Thursday, even though inflation in the euro area slowed sharply last month, analysts said.

The ECB has held eurozone borrowing costs at their current all time lows since November.

But no further monetary easing appears to be on the cards at the regular monthly meeting of the policy setting governing council, given recent data suggesting the tentative recovery of the region’s economy might be gaining traction, central bank watchers said.

Eurozone inflation fell to 0.5 percent in March, data showed this week, the lowest rate since the financial crisis, stoking fears the bloc could be heading for a damaging cycle of deflation.

Inflation in the currency bloc has trended steadily lower in recent months, coming in well below the ECB’s target rate of just under 2.0 percent.

The latest figure, the lowest since late 2009, heaps pressure on the central bank to do something to reverse the trend.

But analysts were confident the central bank will not move just yet.

– No trigger from inflation –

“Another sharp fall in inflation in March has put the ECB’s inflation forecasts at risk and increased the chance of further monetary stimulus. However, as the recovery has strengthened and broadened this winter, we expect the ECB to maintain its stance,” said Berenberg Bank economist Christian Schulz.

ECB officials have repeatedly said they see no threat of deflation, even if president Mario Draghi has reiterated that the central bank stands ready to act if necessary.

Like Schulz, UniCredit economist Marco Valli also believed the ECB would “remain on hold with regard to both conventional and unconventional policy.”

The slowdown in inflation “is unlikely to be a trigger for action, as temporary factors played a major role in this deceleration. In April, inflation will most likely rebound, and the ECB will be aware of that,” Valli said.

“At the policy-relevant horizon, the central bank’s price outlook is likely to remain on track.”

Recent business surveys had so far shown good resilience to the Russian-Ukrainian crisis and to slower Chinese growth, the expert argued.

Annalisa Piazza at Newedge Strategy agreed.

“Recent data have been relatively encouraging, confirming that the moderate recovery is proceeding in line with the ECB baseline scenario,” she said.

Piazza saw a “modest” chance that the governing council could cut the bank’s key “refi” rate currently at 0.25 percent  by 0.10-0.15 percentage point on Thursday.

“But our baseline scenario is for unchanged policy stance,” she said.

Should that be the case, “Draghi is expected to reiterate that the eurozone needs a high degree of accommodation and that the ECB stands ready to act,” Piazza said.

Deutsche Bank economist Gilles Moec also said that “beyond dovish rhetoric, we are not expecting the ECB to ease policy in April.”

Jessica Hinds at Capital Economics said “the pressure will build on the ECB to ease monetary policy further in the coming months to head off deflation and support the economic recovery.”

“While we are not forecasting any move by the ECB on Thursday, we continue to expect the refinancing and deposit rates to be cut by 10 basis points, probably in the third quarter,” Hinds said.

Latest Articles

Business Podcasts

Live prices

Stock Market

Most Viewed