ECB expected to hold its fire despite low inflation

GMT 03:14 2014 Thursday ,07 August

Arab Today, arab today ECB expected to hold its fire despite low inflation

European Central Bank
Frankfurt - AFP

The European Central Bank is unlikely to unveil any new policy moves at its monthly meeting on Thursday, despite a persistent threat of eurozone deflation and geopolitical risks, analysts said.
For the time being, the ECB would likely continue to assess the impact of a package of stimulus measures it unveiled in June, including taking one of its key interest rates into negative territory, they said.
Although the eurozone came out of recession last year and unemployment has fallen slowly, the Ukraine crisis and Western sanctions against Russia present a wild card of uncertainty.
But despite worries over the East-West standoff and very low eurozone inflation data for July, central bank-watchers don't expect the ECB and its chief Mario Draghi to announce new moves this week.
The June measures "will take time to work their way through to the real economy. Unless an emergency arises, the ECB will want to be on hold until December before deciding whether more action is needed," said Berenberg Bank economist Christian Schulz.
Ben May at Oxford Economics similarly believed that Draghi's monthly post-meeting press conference "is likely to prove uneventful. There is little chance of the ECB announcing any new policy measures."
The ECB chief would simply reiterate that the central bank stands ready to take further action if required, the expert said.
Euro-area inflation slowed to just 0.4 percent in July, its lowest level since late 2009.
That was "a timely reminder that disinflationary pressures remain and the economic recovery remains fragile," said May.
"But the ECB is likely to draw comfort from the recent depreciation of the exchange rate," he added.
- Draghi to stay 'dovish' -
The weakening euro is expected to help drive inflation slowly higher over the coming months, even if it is likely to remain below the ECB's target of close to 2.0 percent for a prolonged period.
"After the bold package announced in June, the ECB is now in a wait-and-see mode," wrote Marco Valli of UniCredit Economics, predicting a probably "fairly uneventful" meeting.
"We do not expect the August ECB meeting and press conference to live long in the memory. We do not expect any changes in the key ECB interest rates or any fresh policy announcements," said Richard Barwell of RSB.
"Indeed, we don't expect any major news for some time. Those key ECB interest rates are likely to remain on hold until the end of 2016, and we are unlikely to any get news on asset purchase programmes until December at the earliest," he said.
Natixis economist Cedric Thellier said that while the July inflation data were "disappointing, we believe the ECB will not quit the wait-and-see mode".
The inflation data aside, "the news flow has indeed been rather positive and seems to confirm the ongoing -- very progressive -- recovery".
"It is likely that the central bank won't take further action immediately, but rather catch its breath while it assesses whether the June round of stimulus is effective," Thellier said.
"Nevertheless, in-line with subdued inflation pressure, Draghi will probably keep a dovish tone and let the door open for more monetary policy easing," he concluded.


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