Key Points:
- ECB due to meet to determine monetary policy.
- Inflation, growth, and unemployment remain anaemic.
- ECB may choose to delay decisive action until situation worsens.
The Eurozone economy could potentially be in for another round of stimulus as the fires of inflation continued to dim within the economic community. Subsequently, the stage is set for a relatively important ECB monetary policy meeting that could determine the fate of both the common currency and EU in the near term. However, the question remains as to whether ECB Chair Mario Draghi will take decisive action or keep his powder dry for another day.
Despite successive rounds of asset purchases, inflation has remained relatively depressed within the Eurozone with the latest data proving highly disappointing at 0.2% y/y. In addition, economic growth is also relatively anaemic with the last metric showing a 0.3% q/q gain that has done little to bolster consumer or business expectations. Also, the labour market is in fairly dire straits with the unemployment rate currently hovering around the 10% mark and likely to persist. Subsequently, there are plenty of macroeconomic indicators which would suggest that the upcoming ECB meeting could potentially be a “live” event.
However, the central bank is quickly running out of ammunition given that minimum bid rate is already at 0.00%, effectively resting on the zero lower bound. Subsequently, the ECB has recently leaned heavily towards quantitative easing (QE) in an attempt to stimulate the economy but, whilst their asset purchase is still ongoing, there seems to be little light at the end of the tunnel as far as inflation and growth go. In addition, the limits of stimulus can also only go so far especially when you have a limit of bond and asset availability.
Subsequently, the central bank has some hard choices to make and, like everything in life, timing is critical. Keeping this in mind, we might very well see the venerable ECB hold off on taking decisive action today so that they can keep their policy options open for any potential deeper decline in this year’s final quarter. It is therefore highly likely that there will be no change to the Minimum Bid Rate and no expansion to the stimulus programs in the coming meeting.
Ultimately, even if the central bank was to expand the stimulus program their relative options would be few and likely centre around extending the expiration date of the current program. Alternatively, the bank could look to change their capital key and additionally expand into new asset classes but this is fraught with its own set of problems and could compromise the central bank’s conflict policies.
Subsequently, the likelihood of additional measures is fairly limited and unlikely to occur without at least some warning and expectations setting to markets. The coming meeting is therefore relatively unlikely to provide anything in the way of substance other than some additional “jawboning” from the ECB. The time is fast coming when the central bank will need to act decisively but that time is not now.