The European Central Bank will almost certainly announce new stimulus measures at a policy meeting this week, as eurozone inflation turned negative and the economic outlook continues to look cloudy
After disappointing financial markets with what were widely perceived as half-hearted measures in December, the European Central Bank (ECB) chief Mario Draghi will announce bolder policy moves this time round, predicted analysts who have been watching the central bank. These were most likely to include a further cut in interest rates, an increase in the volume of bonds purchases each month under its so-called quantitative easing or QE program and a further extension of that measure beyond its current timeframe of March 2017.
"The ECB has signaled a further loosening of monetary policy at its forthcoming meeting," said Capital Economics economist Jonathan Loynes. "And while December's under-deliverance highlights the risk of another disappointment, the deteriorating economic outlook should persuade the governing council to be bolder this time," the expert said.
With area-wide inflation back in negative territory - inflation fell to minus 0.2 percent in February for the first time in five months - and eurozone growth not expected to pick up any time soon, the case for further stimulus measures is clear, said Berenberg Bank economist Holger Schmieding.
"Amid heightened uncertainty about the world economy, rising political risks in Europe and renewed concerns about the health of the European banking system, financial volatility will likely impair the transmission of the ECB's current monetary stimulus to the real economy for a while," Schmieding said. "To bring the economy back to trend growth nonetheless, the ECB needs to do more." Capital Economics' Loynes predicted a cut in the key deposit rate from minus 0.30 percent to minus 0.5 percent, and an increase in the monthly QE purchases from 60 billion euros ($66 billion) to 80 billion euros ($88.1 billion).
The deposit rate is the interest which the ECB usually pays banks for the excess liquidity which they park with it overnight. But it has been negative since June 2014, meaning the ECB effectively charges the banks for using the facility, in the hope that they will instead lend to businesses and companies to get the economy moving.
Banks have complained the currently ultra-low interest rate environment is eroding profits, and pushing the deposit further into negative territory could harm them further still.
Commerzbank economist Michael Schubert suggested the ECB might therefore introduce a tiered interest rate scheme to ease the burden on banks, whereby lenders would pay a lower or no penalty rate at all, up to a specified amount of excess liquidity.
"A tiered interest rate would probably send a clearer signal, as monetary policy does not only depend on the size of the rate cut, but also on the scale of possible additional action," Schubert argued. "If a tiered rate system were introduced, the burden on banks would rise less strongly and the deposit rate could be cut more sharply than if the ECB stuck to a universal penalty rate."
But Berenberg Bank's Schmieding said Draghi might have difficulty communicating such a move to the markets.
"It could be technically difficult to define the dividing line between 'normal' and 'excess' deposits," he said.