ECB set to sit tight on rates despite moribund economy

FRANKFURT — The European Central Bank (ECB) is likely to hold fire on new policy moves Thursday and leave a series of radical recent measures to take their course, despite pressure over a weak economic recovery, analysts say.

Unlike moves by the US Federal Reserve to end its stimulus spree and a surprise monetary easing plan by the Bank of Japan, ECB policymakers are expected to sit tight at their monthly meeting.

The week looks set to be particularly busy for the ECB, which on Tuesday takes on its role as Europe's banking watchdog in a historic shake-up to help ward off another financial crisis.

Howard Archer, of IHS Global Insight, said no new ECB decisions were likely for the time being, adding that "the bank will very probably remain in 'wait and see' mode into the New Year".

Interest rates are currently at their all-time lows anyway — 0.05 per cent for its main "refinancing" rate — and a rate hike seems unlikely at a time when the ECB is seeking to boost inflation from its stubborn lows.

Inflation in the 18-nation eurozone edged up to 0.4 per cent in October, official data showed Friday, far below the 2 per cent target set by the Frankfurt-based ECB, which has a core mission of ensuring price stability.

"If survey-based inflation expectations fall further, the pressure for additional ECB monetary easing will increase," Commerzbank's chief economist Joerg Kraemer said, however.

Current low inflation levels have stoked fears of deflation — when prices actually fall — which, if it takes hold, can trigger a vicious spiral where businesses and households delay purchases, throttling demand and causing companies to lay off workers.

Nevertheless, Carsten Brzeski, of ING-DiBa, said the latest "better-than-feared" economic eurozone data was one of several factors likely to allow the ECB "to wait, at least until the December meeting before possibly deciding on new action".

Expanding bank's balance sheet 

In addition to cutting interest rates, deflationary fears have prompted the ECB to pull out other tools, such as a series of liquidity programmes to inject cash into the economy.

After its TLTRO, or targeted long-term refinancing operations scheme, to make cheap liquidity available to banks on condition they lend it on to companies, and a programme to buy covered bonds, its latest move to kickstart credit in the euro area begins this month.

The ECB is launching purchases of asset-backed securities (ABS), or bundles of individual loans such as mortgages, car loans and credit-card debt sold on to investors, to allow banks to share the risk of default and free up funds to offer more lending.

But the central bank's target of boosting the size of its balance sheet by 1 trillion euros ($1.25 trillion) has made little headway through the first TLTRO or the initial covered bonds purchases.

Analysts have suggested that some banks may have preferred to hold off until after the results of the ECB's most stringent-ever audit were published. Last week, that audit awarded a clean bill of health to a large majority of eurozone banks.

Investors will be watchful Thursday for any comments by ECB President Mario Draghi on the possible purchase of corporate bonds following speculation this could be on the horizon.