Hopes of rate cut rise but euro concerns remain

European Central Bank president Mario Draghi signalled that officials are ready to ease monetary policy next month and stepped up his expressions of concern about the euro’s exchange rate.

“The Governing Council is comfortable with acting next time, but before we want to see the staff projections that will come out in the early June,” Mr Draghi said at a press conference in Brussels. “There wasn’t a decision today. It’s a preview of the discussion we will have next month.”

ECB officials are debating how much stimulus they might need to add to a euro region economy haunted by the threat of deflation. While Mr Draghi gave no signal that radical moves such as quantitative easing are imminent, new economic forecasts next month may give them the scope to cut interest rates or inject more money into the region’s financial system.

“The probability for rate cuts at the next meeting is now above 50%,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “We expect a cut in the main refi and also in the deposit rate by 10 basis points. We still do not expect QE to happen.”

Mr Draghi also said the euro is “a cause for serious concern” after its 6% climb over the past year took it close to $1.40. The euro dropped after Mr Draghi’s comments on next month’s decision.

Euro-area government bonds rose as Spanish and Italian yields reached record lows and German 10-year yields approached the least in a year.

The ECB left its benchmark rate at a record low of 0.25% and the deposit rate at zero percent. The marginal lending rate was held at 0.75%.

The threat of deflation haunts policy makers as the region’s southern flank struggles to recover from a euro crisis that threatened to break the bloc apart as recently as two years ago.

At 0.7%, inflation in April was less than half the ECB’s target, which is “close to but below 2%.” At the same time, that reading was above the 0.5% level recorded in March.

Recent economic data have signalled that the currency bloc is recovering from its longest-ever recession, which ended last year, and survey indicators point to a further pickup in activity.

Service industries in Spain and Ireland, which have both exited international bailout programmes in the past six months, showed the fastest growth since before the financial crisis in March, according to purchasing managers indexes by Markit Economics this week.

Bloomberg