The European Central Bank will be holding its monetary policy meeting later today in Frankfurt. The meeting will be crucial, considering that the ECB President Mario Draghi hinted at further easing a month ago.
The monetary policy meeting comes on the back of the inflation data for June. Latest eurozone economic data revealed that consumer prices rose higher than expected. On a year over year basis in June, consumer prices grew 1.3%. Despite the gains, this was still off the ECB’s 2.0% inflation target rate.
Core inflation rate also grew modestly but still remains far off from the ECB’s inflation target rate.
Heading into the ECB’s monetary policy meeting, the central bank is expected to leave the main refinancing operations unchanged at zero percent. The central bank is also expected to leave the marginal lending facility at 0.25% and the deposit facility rate at -0.40%.
The ECB has kept the deposit facility rate unchanged at -0.40% since June 2014.
Draghi Hints at Fresh Stimulus
The ECB President Mario Draghi hinted that the European Central Bank could unleash more stimulus if the economy continued to stagnate. His comments came at a press conference in Sintra, Portugal in mid-June.
His comments came against the backdrop of a slower demand globally and lack of inflationary pressures. Following his comments, the euro currency dropped sharply lower, inviting the ire of US President Trump.
Trump has been a vocal opponent to the ECB and has alleged that the central bank pursues a weaker exchange rate policy to be competitive. The ECB refutes the allegations.
Will the ECB Take any Measures at this Meeting?
Following Draghi’s dovish comments, the markets are expecting to hear some announcement at today’s meeting. However, the monetary policy is unlikely to see any changes today.
On the contrary, it is quite likely that the ECB could tweak its forward guidance. This could mean that there is a possibility that Draghi will announce a rate cut at the September meeting.
While it is unclear on the timing, the forward guidance will give investors more clarity.
There is also talk about the central bank restarting its bond purchase program. By some accounts, the ECB could also announce its QE program once again.
Speculation is that the central bank could announce as much as 15 billion euro in the new quantitative easing program. This is likely to start sometime in autumn this year.
Why the Dovish Shift from the ECB?
The central bank ended its QE program in December 2018. Back then, the Eurozone had just logged a solid year in economic growth. The ECB signaled that interest rates could raise by the second half of 2019.
Growth concerns plagued the eurozone ever since the start of the year. Inflation fell sharply over the months. This resulted in a slower pace of growth than expected.
Germany, Europe’s leading economy saw slower growth on the back of a slump in the manufacturing sector.
Other issues such as Italy’s debt levels and the uncertainty due to the Brexit issue remain some of the key risks to the economic growth for the Eurozone. This uncertainty is further heightened by the US and China trade war.
President Trump also turned his attention to the eurozone. At one point, Trump threatened to impose tariffs on imports from the eurozone, putting the region’s growth at further risk.
Against this backdrop, growth in the eurozone slowed significantly. In the first quarter of 2019, eurozone’s GDP growth rate was just 0.40%. On a seasonally adjusted basis, Q1 growth rose 1.2%, comparing to the same period in 2018.
Various international institutions also expect growth to average around just one percent this year.
The ECB’s shift to dovish monetary policy comes on the back of various central banks easing off the rate hike pedal. As a result, it is not surprising that the ECB will be joining ranks with the US Federal Reserve in shifting to a dovish stance.