The European Central Bank meets on Thursday with emerging market tumult bang at the top of its agenda.
It’s probably too early to force a policy move this week – particularly since the next set of ECB economic and inflation forecasts are due in March – but it’s an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January.
If the market turbulence persists and a by-product is to drive the euro higher, which is quite possible, the downward pressure on prices could threaten a deflationary spiral which ECB policymakers have so far insisted will not come to pass.
Euro zone and UK PMI surveys for January will give the latest on the state of Europe’s economic recovery this morning. The Markit/HSBC manufacturing PMI for China has fallen to a six-month low.
The ECB will reveal more detail today on how it plans to go about checking that top euro zone banks have the risks on their balance sheets under control, laying out how it will define when a loan has turned bad and what the next steps will be.
Watch out for signs of coordinated international discussions ahead of the G20 finance ministers in Sydney later in February. Indian central bank governor Raghuram Rajan, a former IMF chief economist, has slammed what he said was a breakdown in global monetary coordination.