The European Central Bank holds its last rates meeting of the year with some of the alarm about looming deflation pricked by a pick-up in euro zone inflation last week – though at 0.9 percent it remains way below the ECB’s target of close to two percent.
The spotlight, as always, will be on Mario Draghi but also on the latest staff forecasts. If they inflation staying well under target in 2015 (which is quite likely), expectations of more policy easing will gather steam again.
For today, another rate cut after last month’s surprise move would be a huge shock. Launching quantitative easing is anathema to much of the Governing Council unless it was clear a Japan-style downward price spiral was in the offing, which it isn’t. The bank’s vice-president, Vitor Constancio, has said the ECB would only cut the deposit rate it pays banks for holding their money overnight – now at zero – into negative territory in an extreme situation.
So most likely is a repeat of LTRO low-interest long-term loans for banks and even then, not until next year.
The ECB is clearly uncomfortable with the piecemeal progress on banking union and from euro zone governments with their structural reforms. But with banks facing health checks next year, which could throw up some problems, more liquidity would help them over the hump although there is no evidence that last year’s more than 1 trillion euros pumped any more lending into the real economy.