Euro zone inflation data to set seal on ECB action

June 3, 2014

Euro zone inflation – due at 0900 GMT – is forecast to hold at a paltry 0.7 percent in May, in what European Central Bank President Mario Draghi has labelled the danger zone below 1.0 percent for the eighth successive month.

After German inflation fell to just 0.6 percent on the EU measure on Monday, well below forecasts, the bloc-wide figure could also undercut. We already know the Spanish and Italian inflation rates were just 0.2 and 0.4 percent respectively last month. If that comes to pass, any doubts about ECB action on Thursday, which are thin on the ground anyway, must surely be banished.

A clutch of senior sources have told Reuters the ECB was preparing a package of policy options for its meeting on Thursday, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms (SMEs).

Measures being cued up included taking the ECB’s deposit rate negative for the first time – thereby charging banks to park money with the central bank in the hope they will lend it instead.

There are potential unintended consequences here. The ECB is trying to make money cheaper and more plentiful in the euro zone but the banks could pass this cost onto customers, a de facto tightening of policy, or deposit less money at the ECB which could drive up money market rates – another de facto policy tightening.

Either way, it’s unlikely the banks will lend much more without a helping hand, given stress tests are looming later in the year, so the ECB is likely to offer some sort of long-term cheap liquidity injection in tandem in order to kick start credit flows.

Prior to a meeting of G7 leaders in Brussels in Wednesday – called after the West decided to snub Russia’s G8 gathering – President Barack Obama will visit Poland where he will meet 10 central and eastern European leaders, including Ukraine’s newly-elected president Petro Poroshenko, who will be keen to hear his plans to prevent more instability in the region in the hope of more active U.S. engagement.

NATO ministers, meeting in Brussels, will discuss temporarily reinforcing forces in Poland and consider what longer term steps the alliance needs to take to bolster its eastern defences and improve its ability to respond to the tactics used by Russia in Ukraine.

Warsaw has been calling for NATO to permanently station forces on its territory in response to Russia’s actions, a move that Moscow says would violate a 1997 agreement between Russia and NATO. It would also be expensive.

Russia and Ukraine agreed on Monday to examine a payment plan to settle Kiev’s multi-billion gas debts and fix a price for supplies until June 2015, offering the promise of averting an energy crisis over the winter period. Gazprom is holding a news conference this morning.

Syrians are voting in an election expected to deliver an overwhelming victory to President Bashar al-Assad in the midst of a civil war that has fractured the country and killed more than 160,000 people. Assad’s opponents including rebel fighters, the political opposition in exile, Western powers and Gulf Arabs have dismissed the election as a charade.

Hungarian top court Kuria is to decide on an fx loan case, the latest step in a long running legal saga ahead of an expected government measure to help Hungarians who borrowed in foreign currency which will hurt the banks.

The government has said it was waiting for a “uniform” ruling by the Kuria before it makes its own decision and draws up legislation. The Kuria is not expected to make a final ruling today but could give some heavy clues.

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