European Central Bank ‘finally ready’ to act to fight deflation

FRANKFURT - Agence France-Presse

European Central Bank president Mario Draghi

Financial markets are betting on an interest rate cut from the European Central Bank next week as low inflation, the strong euro and anaemic credit finally spur it into action.

The ECB has held its key interest rates steady at their current all-time lows since November, repeatedly promising to act if necessary to avert deflation in the 18 countries that share the euro.

Inflation is still way below the ECB’s target of 2.0 percent and shows little sign of picking up any time soon. Hence, ECB president Mario Draghi more or less pre-announced a move at the bank’s last policy meeting, saying the central bank’s decision-making governing council was “dissatisfied” with the current path of inflation and was “not prepared to accept it as a fact of nature.” But the precise method and extent of any monetary easing would depend on the ECB’s updated inflation forecasts, scheduled for next week, Draghi said.

“I would be very surprised if nothing happens” at the meeting on May 5, UniCredit economist Marco Valli told AFP. “The markets would not take it very well.”

“Economic conditions in the eurozone certainly justify strong action, especially inflation persistently below 1.0 percent since October,” said IHS Global Insight analyst Howard Archer. “And if the ECB fails to deliver having built up expectations, it risks upsetting the markets and also denting its credibility.” A range of data last week backed up the need to act. Area-wide growth came in at a disappointingly meagre 0.2 percent. Money supply growth – which the ECB uses as a guide to future inflation – was anaemic. And loans to the private sector, hitherto the stumbling block to a more sustained recovery, continued to fall.