Regarding the timing of later moves

Inflation in focus at ECB meeting

GMT 07:00 2013 Thursday ,05 December

Arab Today, arab today Inflation in focus at ECB meeting

ECB will withhold new policy measures
London - Arab Today

ECB will withhold new policy measures London - Arab Today The European Central Bank will withhold new policy measures at its final meeting of the year Thursday after a surprise quarter-point rate cut last month, analysts said. But the financial markets will be keeping a close eye on the ECB's latest growth and inflation forecasts as to any clues regarding the timing of later moves, the analysts said. The ECB took markets by surprise last month and pared back its central "refi" refinancing rate by a quarter of a percentage point to a record low of 0.25 percent. The trigger for the move was an unexpectedly sharp slowdown in area-wide inflation to just 0.7 percent in October. In November, the inflation rate increased fractionally to 0.9 percent. But analysts believe that does not sound the all-clear and the ECB may have to take further action again at some point. "Following the unexpected rate cut on November 7, Thursday's ECB meeting is unlikely to bring any policy change. We expect interest rates to be kept on hold and no new unconventional measures," said UniCredit economist Marco Valli. Nevertheless, "investors' focus will be squarely on the ECB's updated macro-economic projections, especially those for CPI (consumer price index), which will reveal the numbers that convinced the central bank to cut rates and introduce a new dovish inflation rhetoric," Valli said. Commerzbank economist Rainer Guntermann also said he expected the ECB "to stay put" this week, "as the bounce in euro area inflation has taken some steam out of the deflation debate for now." However, "the projections for 2015 add some excitement," Guntermann continued. "Should (they) fall noticeably short of the figures previously assumed, the ECB looks poised to act swiftly as it has demonstrated after the downward surprise in October," he said. There is much concern that the persistently low level of inflation in the 17 countries that share the euro could turn into deflation. ECB officials have been keen to stress that they believe what the eurozone is currently experiencing is "disinflation" not "deflation". Disinflation describes slowing price rises which remain in positive territory but reflect a stagnating economy in which growth and jobs are elusive. By comparison, deflation is where prices fall in real terms, which encourages consumers to put off buying goods in the expectation that if they wait, they will get them cheaper. That dampens demand, adding to the downward pressure in the economy as companies hold back investment, in turn impacting jobs and demand in a vicious circle seen at its worst in the 1930's Great Depression. "The cut in rates (in November) has not markedly relieved the pressure on the central bank to take additional action to support what remains a very fragile economic recovery and head off deflation," said Capital Economics economist Jonathan Loynes. Marie Diron at EY Eurozone Forecast agreed. "We think that the ECB needs to recognise the risk of deflation more clearly and act pre-emptively," she said. Analisa Piazza at Newedge Strategy nevertheless believed that "near-term deflation risks have somewhat diminished in November". Thus, "the ECB doesn't need to act now, but we suspect that any undershooting of the current inflation path would be a trigger for further accommodation at any time," Piazza said. Another possible move would be for the ECB to pump more liquidity into the financial system, as it did at the end of 2011 and the beginning of 2012 using long-term refinancing operations (LTROs). "In a nutshell, we rule out that the meeting will bring any surprise and no clear indications about future steps are expected to emerge," said Newedge Strategy's Piazza. Source: AFP

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