The European Central Bank is expected to stand pat at today’s monetary policy vote.
Interest rates are very likely to remain unchanged at record lows and little is expected on the central bank’s plans to buy asset-backed securities or embark on full-scale quantitative easing.
The decision is out at 12.45pm UK time.
A lot of ECB watchers think that, unless there is a major economic shock, the governing council won’t plump for any serious action at least until December. Monetary policy makers will want to gauge the impact of the package of measures announced in June before deciding whether to act again, they argue.
To some, that might seem reasonable. But it won’t stop its president Mario Draghi facing some tough questions at today’s press conference. Here are some reasons why:
1. Bleak news on growth
Data published over the past few days have painted a troubling picture of the eurozone economy.
Yesterday data showed that Italy’s economy, the region’s third largest, was back in recession, while German industrial orders slid by the most in two-and-a-half years. June industrial production figures for Spain, published on Thursday, dashed expectations.
Few expect next week’s eurozone GDP figure to show anything but meagre growth. The ECB’s forecasts of growth of 1 per cent this year could prove optimistic.
2. Geopolitical tensions
The crisis in Ukraine is also stoking concern about the recovery. The escalation in the tensions is proving especially worrisome in the bloc’s biggest economy, Germany, where it has been blamed for the slump in industrial orders and cited by businesses as a threat to profits.
In some respects this is odd. Even in Germany, Russia accounts for just 3 per cent of total exports.
But in a region battered by economic and financial crisis, confidence remains fragile and the threat posed by Russian President Vladimir Putin could impact businesses’ plans to invest.
3. Inflation concerns
Inflation dipped to a fresh four-and-a-half year low of 0.4 per cent last month. That’s less than a quarter of the ECB’s target of below but close to 2 per cent.
It’s fair to say that the latest data does not suggest the threat of a vicious bout of deflation that would wipe out the recovery by weakening demand and curtailing lending has risen markedly. The fall was generated by weaker energy and food prices. That owes more to global factors, than the sort of fall in domestic demand that would ramp up the risk of a prolonged bout of falling prices. But inflation has been below 1 per cent for ten months now.
The drift towards zero cannot be good for inflation expectations. This post, from fastFT’s Robin Wigglesworth, suggests expectations are already starting to become unanchored. It would be risky for the ECB to let markets’ trust in policy makers’ commitment to hit their inflation target weaken further.
4. Political pressure
The French elite has taken another bash at the ECB. Following Airbus’s complaints about the strong euro, President François Hollande told Le Monde earlier this week that there was a “real deflationary risk”.
Mr Draghi has done a pretty good job of affirming the central bank’s independence to set monetary policy as it sees fit, without political pressure.
More worrying is how the woeful Italian GDP figure affects Matteo Renzi’s willingness to undertake structural economic reforms. If Mr Renzi backtracks, that could have important repercussions for the ECB’s ability to garner support for purchases of government bonds, should GDP and inflation continue to disappoint in the second half of the year.
5. ABS purchases
Mr Draghi said in June that the governing council had unanimously agreed “to intensify preparatory work” on purchases of asset backed securities by the ECB.
Most welcome this form of credit easing as a means to tackle the slump in lending to the bloc’s businesses. But exactly what the ECB has done over the past couple of months is unclear.
To boot, comments in recent weeks by the National Bank of Austria’s Ewald Nowotny and Ardo Hansson, of the Bank of Estonia, which suggest they’re not massively keen on the plans, have undermined perceptions of the degree to which all of the governing council supports the idea.
We shall see shortly after 1.30pm UK time whether the ECB president has anything to say about that.