Markets to closely watch ECB meeting

The ECB meeting on Thursday is the prime event for markets seeking clarity on the bank’s response to a stalled recovery, disappearing inflation and the sluggish pace of reform in the eurozone.

Inflation in the €9.6tn euro economy dropped to a fresh five-year low of 0.3% in August.

Increased geopolitical risks from the intensifying conflict in Ukraine forced Europe to impose sanctions on its third biggest trade partner, Russia, a move which dented the faltering economic rebound even further.

In a speech in Jackson Hole, Wyoming, last week, ECB President Mario Draghi struck a new — for some, groundbreaking — tone, trying to cajole European governments into agreeing a common approach to reforming their economies — a drive he sees as necessary to allow the stagnant eurozone to grow.

With countries such as the eurozone’s second and third largest economies, France and Italy, not growing, the ECB may have to reach deeper into its policy toolbox, with some analysts even betting on an interest rate cut at the bank’s meeting on Thursday.

“We expect the ECB to cut all key interest rates by a further 10 basis points, thereby delivering a larger negative deposit rate (-0.20%) as well as a refi (refinancing) rate even closer to zero (0.05%),” Nomura wrote in its global market research.

The question most ECB watchers are now asking is when, not if, the Frankfurt-based bank will embark on quantitative easing — the printing of money to buy government bonds which is now the markets’ base scenario.

Even though central banks in the US, Japan, and Britain among others embarked on such a course several years ago, the ECB has been reluctant to follow suit.

However, a number of economists deciphered Draghi’s tone at Jackson Hole as signalling that deflationary risks had risen enough to merit further policy easing, following a rate cut in June combined with measures to flood banks with more cheap money.