Cut to ECB’s main interest rate looking likely

There will be a backlash from the markets if the ECB does not give clear guidance on unconventional measures to stimulate growth in the region allied to an interest rate cut.

A number of comments from ECB board members over the past few weeks have ratcheted up expectations that there will be a cut to the ECB’s main interest rate and the deposit rate will drop below zero.

However, the problems of the banking system, which is still struggling with high levels of non-performing loans, means the transmission mechanism for getting credit flowing is not functioning properly.

It is unlikely that another cut to the interest rate will have a material impact on this problem, says Investec chief economist, Philip O’Sullivan.

The ECB is also looking at unconventional measures to get the economy moving, including quantitative easing, and an asset-backed securitisation programme for SMEs.

If today’s monthly meeting fails to give proper guidance on how and when one of these options will be used, the euro could fall.

However, ECB president Mario Draghi has been looking at ways of weakening the single currency. Consequently if the euro did tumble, then that would suit Mr Draghi, says Mr O’Sullivan.

“We see a high risk there will be disappointment,” said Cosimo Marasciulo, Dublin-based head of government bonds and currencies at Pioneer Investment Management, which oversees approximately $244bn (€179bn). “The market is looking for some form of quantitative easing, or at least an opening of the door to quantitative easing, and we think the ECB will be reluctant to do this. Those who bought bunds and Italian bonds on expectations that quantitative easing in the eurozone was very close may be disappointed.”

Mr Draghi will probably signal that any interest-rate cut this week won’t necessarily be the final one, according to two eurozone central bank officials.

Additional reporting Bloomberg