Central Bank tipped to cut rates and increase QE
Financial markets expect the European Central Bank (ECB) to cut its deposit rate by at least 10 basis points and expand its asset-buying programme this week, and still do not expect it to hit its inflation target in the near future.
Eurozone government bond yields and short-term interest rates fell on Tuesday after weak Chinese trade data revived concerns over growth. But wariness before today's ECB meeting prevented a test of last week's lows.
Markets are pricing in a deposit rate cut to -0.4pc and €10bn to €30bn extra bond buying every month, signalling that inflation is not expected to reach anywhere near the ECB's target of just under 2pc. Concern that negative interest rates could irreparably damage the financial sector has also led to some speculation the ECB could introduce tiered interest rates, like in Japan.
And after being disappointed in December, when policymakers delivered less monetary easing than they had flagged, investors do not expect the ECB to be more aggressive. "Having been burnt once already in December last year, expectations around this week's meeting are much more tempered," CMC Markets chief markets analyst, Michael Hewson, said.
"They don't want to disappoint this time around," Commerzbank strategist, Rainer Guntermann, said. Speculation suggests the ECB may extend quantitative easing beyond March 2017 and buy extend the range of assets it buys. (Reuters)