With inflation falling, the ECB has room to do more to boost the economy
Further European Central Bank action to jump start the eurozone economy: Let me get back to you.
ECB President Mario Draghi says he's doing what he can. Interest rates have been held at a record low since last July, and the bank has no plans to withdraw the extraordinary measures it put in place to head off a break up of the eurozone.
But a year after throwing unlimited cash at banks and six months since revealing its untested plan to buy government bonds -- known as Outright Monetary Transactions, or OMT -- the central bank is running out of reasons not to return to the fray.
Only a minority of economists polled by Reuters expect the ECB to lower interest rates when it meets Thursday, in part because a cut may not help much. But some analysts believe Italy's chaotic election and the darkening economic outlook could force the bank to reconsider.
"An ECB rate cut next week now looks likely, and Draghi will stress that the OMT bond-buying program is there to assist if needed," noted Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment.
Last month, the European Commission projected a second consecutive year of decline for the eurozone economy and rising unemployment, which hit a record high of 11.9% in January.
Many economists believe the commission's forecast of a contraction in gross domestic product of 0.3% this year to be overly optimistic. The skeptics cite government cuts, depressed consumer spending and a relatively strong euro, which is making life harder for Europe's exporters.
New forecasts from the ECB due this week could paint an even gloomier picture, and with inflation falling to 1.8% in February -- in line with the ECB's target of below but close to 2% -- the bank has room to relax policy further without testing the limits of its mandate to control prices.
An eight-month rally on European stocks has come to an end; the European blue-chip Euro Stoxx 50 index has lost 1.2% so far this year. And government bond yields in Italy, and to a lesser extent Spain, have moved up from early January lows.
"The key questions are around the ECB," Nick Gartside at J.P.Morgan Asset Management wrote in a note. "How bad do things really have to get? Or, is the ... threat of action so well understood, that markets won't be tempted to find out?"
A better bet for more central bank action this week is the U.K., which lost its AAA credit rating with Moody's late last month.
The U.K. economy is on the brink of a triple-dip recession. It shrank by 0.3% in the final quarter of 2012 and is struggling to return to growth. Manufacturing output slumped in February, according to a Purchasing Managers' Index on Friday.
Minutes of the last Bank of England meeting showed Governor Mervyn King and two colleagues voted to inject more cash into the economy by extending its program to buy government bonds. They were outvoted, but the last time the bank's monetary policy committee was similarly divided, it voted at the next meeting to relax policy.
And the Bank of England has been toying with the idea of negative interest rates, according to its deputy governor Paul Tucker.
That would mean, in effect, the central bank would charge commercial banks that deposit money with it. The goal: get them to use the money to lend to companies and households instead.
U.K. interest rates have been at a record low of 0.5% since March 2009 and the bank last added to its quantitative easing program in July 2012. The pound has fallen by more than 6% against the dollar and the euro so far this year on the poor growth outlook and expectations of easier monetary policy.
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