independent

Wednesday 16 April 2014

ECB rate cut not expected, eyes on inflation

Mario Draghi
Mario Draghi

New economic projections from the European Central Bank (ECB) today are likely to point to euro zone inflation remaining below target into 2015, raising pressure on the Frankfurt-based body to take fresh policy action next year.

The ECB is widely expected to leave interest rates unchanged at its final policy meeting of this year, after surprising markets last month with a cut in its main rate to a record low of 0.25pc.

With governments slow to respond to the euro zone crisis, the ECB has played a major role in bringing the bloc back from the brink of break-up but now faces resistance to further policy action from its German-led hawkish minority.

November's cut followed a fall in euro zone inflation to 0.7pc in October - far below the ECB's target of just under 2pc. It has since picked up to 0.9pc and unemployment fell in October, offering the ECB a reprieve.

"Mario Draghi is action man," Berenberg bank economist Christian Schulz said of the ECB president.

"If he sees a need for action, then he acts ... but the opportunity to do more simply isn't there because the data has improved."

At the ECB’s news conference this afternoon, Draghi will present updated projections from the ECB's staff, which will include their first forecasts for 2015.

The new estimates will give markets insight into the ECB's view on inflation over the medium term, the horizon over which it aims to deliver price stability in line with its target.

Should the new projections point to inflation still clearly undershooting the ECB's target in 2015 - analysts expect a forecast of 1.3 or 1.4pc - expectations will grow that the bank will take fresh action early next year.

Schulz expected the new forecasts to show inflation remaining below the ECB's target in 2015.

"That will raise questions next time Draghi goes to the European Parliament as to why they are not doing more to achieve their own target, and could raise the pressure on the ECB to do more over the coming months," he said.

However, the ECB's hawks would resist further easing.

The ECB is already running up against opposition in Germany, where Markus Soeder, the finance minister of the southern state of Bavaria, said on Saturday the bank's low interest rate policy threatened financial order in the euro zone and caused a "stealthy expropriation" of German savings.

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