The most-radical policy decision of Mario Draghi's two-and-a-half years at the helm of the European Central Bank could hinge on a single piece of data published tomorrow.
A weak inflation reading tomorrow will probably see the ECB president facing calls to act as soon as next week by imposing negative interest rates for the first time or pushing forward with plans for quantitative easing. Economists in a Bloomberg survey predict consumer prices rose 0.8pc this month from a year ago, compared with 0.5pc in March.
A lower-than-forecast number would undermine the ECB's view that inflation should rebound as temporary distortions pass and the economy recovers. Draghi has been increasingly explicit about what might prompt action if it doesn't, saying that broad-based asset purchases are possible should the medium-term outlook for prices worsen.
"If inflation doesn't pick up from last month, then it's game over for wait-and-see," said Richard Barwell, senior economist at Royal Bank of Scotland. "I expect prices to recover from last month and the ECB to play for time if they can."
Estimates for April inflation range from 0.7pc to 0.9pc, according to the Bloomberg survey. Price gains have been below 1pc since October, compared with the ECB's goal of just under 2pc, and March's figure was the weakest in four years.
Should this week's data miss estimates, the ECB is more likely to cut interest rates, according to Credit Agricole CIB.
The benchmark main refinancing rate has been at a record-low 0.25pc since November and the deposit rate at zero since July 2012.
"If April inflation undershoots expectations, it would strengthen the case for early ECB action in May," said Frederik Ducrozet, an economist at Credit Agricole in Paris. "The first step would be a cut in the refi rate and possibly a liquidity-easing measure. For QE, inflation needs to remain stable."
Other indicators this week include confidence surveys tomorrow and unemployment on May 2. The picture is likely to be mixed. Economic confidence climbed to the strongest since July 2011, while the jobless rate held near a record high at 11.9pc, according to separate Bloomberg surveys.
Some policymakers have warned against rushing to a decision. ECB Vice President Vitor Constancio said yesterday the central bank would look at more than just this month's data.
"It's important information, but it's not the only aspect," he said at a conference in Frankfurt. "What we need is a well-fundamented view on a possible revised medium-term path for inflation. It's not just one or two numbers that matter."
Governing Council member Ewald Nowotny, head of Austria's central bank, said in an interview with 'Der Standard' on April 23 that any decision should wait until June, when the ECB will revise its macroeconomic forecasts for growth and inflation.
Speaking in Amsterdam last week, Mr Draghi provided his most detailed explanation yet of the ECB's thinking on policy by outlining three contingencies.
The first would be an unwarranted monetary tightening, which he said could be caused by higher short-term money-market rates, rising global bond yields, or an appreciation in the euro. Those factors could be addressed by conventional measures, including rate cuts, an extension of fixed-rate, full-allotment operations, and longer-term loans to banks, he said.
The overnight cost of interbank borrowing in the euro area was at 0.331pc on April 25, after averaging 0.192pc in March and 0.157pc in February. The euro has climbed 6pc against the dollar in the past 12 months.
The second contingency would be impairments in the transmission of monetary policy, which could be tackled with targeted loans to banks or the purchase of asset-backed securities.
The ECB and European Commission said today that while integration in European financial markets has improved, it is still more fragmented than before the debt crisis. There is room to promote integration in corporate bonds, equity and banking markets, the institutions said in reports.
The third scenario would be a worsening of the medium-term inflation outlook, either because of a broad-based weakening of aggregate demand or a shock that loosens the anchoring of inflation expectations. Mr Draghi said that would require the ECB to "meaningfully" ease monetary policy and would "be the context for a more broad-based asset-purchase programme." (Bloomberg)