Just about all agree that the ECB will have to act on Thursday ..... whether it will do the trick is not so clear.

Monday 7th March 2016

  

Just about all agree that the ECB will have to act on Thursday ..... whether it will do the trick is not so clear. 

ref :- "Draghi Aims ECB's Killer Blow in 11th Round Versus Deflation" , Bloomberg Business

Absolutely no doubt about what will grab the most attention this week ..... the ECB meeting and its monetary policy announcement on Thursday. We've been hearing quite a few doubts recently about the efficiency of negative rates in countering deflation and promoting growth, and about the dangers they may pose in the longer term to the banking sector in particular. Nevertheless, Bloomberg's survey of economists reveals that all but one respondent expect a cut in the discount rate (currently minus 0.3%), and a large majority see either an expansion or an extension to the bond-buying QE programme, or both.

Whatever the concerns over the difficulties in ultimately having to unwind such radical measures at some point in the future, the markets' adverse reaction in December when they viewed ECB's limited easing of policy as inadequate means firmer action is pretty much guaranteed this time. Faced with another slip into deflation and disappointing growth figures, ECB boss Mario Draghi will know that he has to act decisively to avoid a potentially hugely damaging loss of confidence.

So what exactly can we expect? According to Bloomberg:

Most foresee that the deposit rate will be cut from minus 0.3% to minus 0.4%, although a few hope for minus 0.5%

A majority see some kind of tiered deposit rate being introduced to protect banks' profitability and thus encourage them to keep lending (and also prevent the sort of run on financial sector stocks that we saw just a few weeks ago)

Of those who predicted an EXPANSION of the QE programme (which is nearly 75%), the median estimate is for an increase to 75bn euros per month from the current 60bn euros. With QE due to run until March 2017, that equates to an extra 200bn euros over the remaining course of the bond-buying programme.

More than a third of those surveyed expect an EXTENSION to QE, and of those most see it being stretched to late 2017.

If everything looks a little bleak just now, the survey revealed that some encouragement can be gleaned (we suppose) from the relative optimism that Mr Draghi can do what needs to be done at this meeting. Over 70% believed that there would be no further expansion to QE after this month. 60% said there would be no further cuts in the deposit rate. More surprisingly perhaps after data showed that Eurozone inflation had slipped back to minus 0.2%, 80% of those economists surveyed believed Mr Draghi would achieve the ECB goal of 2% inflation by the end of his term in 2019  --  that's down just 3% from last month's survey conducted before the release of the latest disappointing data. 2019 is a long way away of course, but still .....

So this week's meeting is pretty crucial, and the stakes could barely be higher. Mr Draghi, who is nobody's fool, will know that better than anyone.