ECB hopes to instil confidence in face of gloomy outlook - GulfToday

ECB hopes to instil confidence in face of gloomy outlook

Germany

A mural reading “The future is Europe” is seen near the European Council headquarters in Brussels, Belgium. Reuters

FRANKFURT: The European Central Bank is all but certain to keep policy on hold on Wednesday, taking its time to evaluate whether its most recent stimulus is enough to arrest a rapid decline in sentiment.

With economic powerhouse Germany skirting a recession, the ECB has already been forced to backtrack on plans to tighten policy and now faces calls to do more, even though the root cause of the downturn, weak demand from abroad, is largely beyond its policy reach.

In the latest move in his global trade war, US President Donald Trump on Tuesday threatened to impose tariffs on $11 billion worth of European Union products, while the International Monetary Fund cut its forecast for world economic growth this year.

Meeting earlier than usual so they can attend the IMF’s spring meeting in Washington DC this week, ECB policymakers are likely to discuss market speculation about further delays to their first post-crisis rate hike and the side effets of years of negative rates. But they are likely to stick to a long-standing line that ultra-easy policy is working as intended, and that banks remain net benefactors of record low rates so there is no acute need to compensate them for the hefty fee they pay to park their excess cash at the ECB.

The latter debate, simmering since 2016, is likely to intensify on Wednesday, however, as the growth slowdown suggests the ECB’s -0.4 per cent deposit rate could stay in negative territory even longer than now expected. ECB President Mario Draghi has already said the euro zone’s central bank must consider whether it needs to mitigate the side-effects of negative rates.

One option under study is a tiered deposit rate, which would shield lenders from part of the cost, in a similar vein to moves by central banks in Switzerland and Japan.

“Although the ECB ruled out tiering in March 2016, the situation has since changed, and it could be implemented eventually if policy rates were to remain negative for even longer into 2020,” Pictet Wealth Management economist Frederic Ducrozet said.

“In the end, tiering is all about the credibility of forward guidance and the ECB signalling its ability to cut rates again in the next downturn,” Ducrozet added.

The ECB announces its rate decision at 1145 GMT, followed by Draghi’s news conference at 1230 GMT. The Federal Reserve will publish the minutes of its latest policy meeting at 1800 GMT.

Reuters