ECB On A Tightrope

The European Central Bank is finding itself in a tight spot as downside risks to Eurozone growth from external events, mainly trade tensions, have increased and inflation in the single-currency bloc sharply slowed, triggering predictions that the bank may re-launch its asset purchases next year.

Markets widely expect the bank to turn more dovish in its stance due to the recent intensification of risks.

“The ECB will stick to its current easing bias, adding a dovish comment here and an easing element there,” ING economist Carsten Brzeski said.

“New pressure from financial markets has increased the probability that the ECB will reveal some details of the new TLTROs this week. Under pressure or not, the ECB will do everything it can to keep the “whatever it takes” spirit alive.”

As hinted by the ECB President in April, the central bank is expected to detail the terms of its new offering of more cash at cheaper rates to banks via long-term loans to boost lending to a slowing?economy.

The new series of targeted longer-term refinancing operations, or TLTRO-III, is set to start in September this year and end in March 2021, thus with a maturity of two years.

The Governing Council, which is holding its June policy session in the Lithuanian capital Vilnius, will have Philip Lane on board as the new ECB Chief Economist.

Lane has been dealt with a challenge, as soon as he started in the new job, in the form of a sharp slowdown in the euro area inflation.

Official figures released on Tuesday showed that headline inflation slowed to 1.2 percent in May from 1.7 percent in April. That is the lowest in just over a year.

Core inflation, which excludes prices of energy, food, alcohol & tobacco, eased to 0.8 percent from 1.3 percent.

Both figures are distant from the ECB’s target of “below, but close to 2 percent”. The doubling of the quarterly growth rate to 0.4 percent in the first quarter, further easing in the jobless rate and a strengthening in economic sentiment should have comforted ECB policymakers slightly, boosting their hopes that inflation is on track to hit the target. However, risks from the intensifying trade tensions and the Brexit uncertainty are likely to keep them on their toes. On the domestic front, there are reasons for concern other than the slowing inflation that signal slower growth in the second quarter.

The latest purchasing managers’ survey showed that Eurozone manufacturing activity remained entrenched inside the contraction territory in May. Retail sales declined unexpectedly in April.

Markets now expect the ECB to launch more stimulus this year and a much ?speculated measure is a tiered deposit rate that can partly reduce the burden of the cost banks pay on the cash they park at the ECB.

However, ECB policymakers are wary of a tiered deposit rate as they fear it could signal that interest rates are going to remain low for a long time.

The new forward guidance issued in March suggest the bank expects the first interest rate hike since the financial crisis to take place in 2020.

Eurozone interest rates were raised last in July 2011, by 25 basis points.

Draghi is set to present the latest set of macroeconomic projections from the ECB staff following the policy announcement and some economists expect further downgrade to the Eurozone growth and inflation outlook.

In March, the ECB lowered the growth outlook for this year to 1.1 percent from 1.7 percent, and the projection for next year to 1.6 percent from 1.7 percent. The forecast for 2021 was maintained at 1.5 percent.

The bank slashed the inflation outlook for this year to 1.2 percent from 1.6 percent predicted in December. The projection for next year was lowered to 1.5 percent from 1.7 percent. The forecast for 2021 was cut to 1.6 percent from 1.8 percent.

The central bank is set to announce its policy decision at 7.45 am ET on Thursday and Draghi will hold his customary post-decision press conference at 8.30 am ET.

The material has been provided by InstaForex Company – www.instaforex.com