The European Central Bank is likely to alter the wording of its forward guidance on Thursday to give a clear signal that interest rates would be cut soon, and that policymakers are ready to add more stimulus if the euro area macroeconomic outlook deteriorates further.
Economists widely expect that rate cut to come in September in the form of a 10 basis points reduction to the deposit rate, which is already in negative territory at a record low -0.40 percent.
That said, a few economists expect the bank to announce a rate cut as early as this month.
The Governing Council, led by ECB President Mario Draghi, is set to announce the policy decision at 7.45 am in Frankfurt on Thursday. Draghi will hold his post-decision press conference at 8.30 am ET.
Minutes of the June policy session showed that policymakers agreed that the bank need to be ready to ease the policy stance further as uncertainties were likely to continue in the coming months.
Economists expect the bank to announce further asset purchases after September’s interest rate reduction, but clearly signal on Thursday that stimulus is coming.
The ECB ended its massive EUR 2.6 trillion Asset Purchase Programme, which began in 2015, in December.
The main refi rate is currently at a record low zero percent and the marginal lending facility rate is at 0.25 percent.
Disappointing macro data, tentative signs that the resilience of the domestic economy is faltering, a potential rate cut by the Fed and continued dovish communication from ECB officials since Sintra, have all pushed the ECB to the point of no return, ING economist Carsten Brzeski said.
“It seems as if the ECB will try to talk a very final talk before walking the walk in September,” the economist added. “However, the risk to this call remains that Mario Draghi will try to surprise financial markets. It would not be the first time.”
Danske Bank analysts expect Draghi to also reveal that ECB staff have been tasked to examine a big easing package including tiering.
Policymakers were open to exploring the need for a tiering system for interest rates, ECB Executive Board member Benoit Coeure said in an interview to the Financial Times in June.
Currently, the prevailing view in the Governing Council is that the tiering system is not needed, Coeure said, adding that “we also agree that it deserves further reflection.”
A tiered deposit rate can partly reduce the burden of the cost banks pay on the cash they park at the ECB.
While leaving the interest rates unchanged on June 6, the ECB extended its forward guidance to reflect its view that rates will remain at the present level at least through the first half of 2020.
However, economic data have been mixed since then and there has been no let up in the global concerns such as protectionism and trade tensions.
In June, Draghi said in a speech in Sintra, Portugal, that the ECB still has room to cut interest rates and to adopt measures to cushion the side effect from low interest rates.
The stimulus signal from Draghi attracted an accusation from the US President Donald Trump that Europe was engaging in currency manipulation.
Eurozone interest rates were raised last in July 2011 by 25 basis points.
Draghi, whose term ends in October, is set to be the only ECB chief thus far who did not raise interest rates. The impending rate cut and further stimulus would be his final push to rev up euro area growth and inflation.
Early this month, IMF Chief Christine Lagarde was chosen to replace Draghi as the ECB President. The former French finance minister is the first woman to be at the helm of the central bank for 19 countries that has euro as the currency.
ECB staff is considering a potential review of the bank’s monetary policy strategy, including its inflation goal, Bloomberg reported this week. Such discussions are set to gain momentum under the new ECB chief Lagarde.
The ECB targets inflation “below, but close to 2 percent.”
Rate-setters considered the need for “more strategic” measures if inflation continued to remain low and that the bank’s communication should stress that deviations of inflation from the bank’s target in both directions would be tolerated, minutes of the June policy session revealed.
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