European markets turned positive on opening Thursday as investors await the latest rate decision – and possibly more stimulus – from the European Central Bank (ECB).
According to economists at Credit Suisse European, a 10bp cut to the deposit rate and a six month extension of the bank’s QE program are expected to be announced at today’s meeting.
However, not all analysts agree with CSE and some expect the central bank to hold rates steady while implementing further stimulus measures in order to boost inflation and growth.
The European benchmark gauge has regained 14 percent from its September low on optimism that the economy is strong enough to withstand higher borrowing costs in the U.S. and that ECB President Mario Draghi will reveal additional stimulus measures at today’s meeting.
At the same time, markets await comments from Fed Chair Janet Yellen when she testifies Thursday morning before the Congressional Joint Economic Committee. She voiced her confidence on Wednesday that the U.S. growth outlook is positive while warning that “waiting too long to end the era of near-zero interest rates could force the central bank to tighten too quickly.”
A Fed rate increase would tighten the economy at the same time the ECB implements moves to loosen its monetary policy.
15bp Possible
The ECB last cut the deposit rate 10bp in September 2014 and Draghi referred to it at the time as a “technical adjustment” rather than full-fledged rate cut. The Governing Council of the central bank is totally behind Draghi and a 15bp rate increase now is not out of the question with another 10bp worth of cuts in the months ahead.
Besides the question of whether Draghi will push for a deposit rate into negative territory, economists are eager to hear how Draghi will handle the size and timetable of the bank's massive 60 billion euro ($63.6 billion) a month bond-buying scheme.
Other possible measures include an increase in the accepted amounts of banks' liquidity on the ECB's current account facility to "mitigate the negative impact of a deposit rate cut on banks" as well as the inclusion of regional government bonds in the ECB's monthly bond purchases.
Euro zone inflation is expected to hold steady in November, unchanged from the previous month with consumer prices in the 19 countries sharing the euro remaining at 0.1 percent from the start of the year to November, helping to boost the case for ECB to increase its massive bond-buying program at Thursday’s meeting. The weak figures are expected to give the go-ahead for Draghi to both increase the pace of its trillion-euro asset purchases and cut its deposit rate.
The ECB rate decision will be announced at 1:45 p.m. Frankfurt time, followed by a press conference at 2:30 p.m. Most economists predict that the central bank will expand stimulus, with a majority of those surveyed projecting an extension of QE past 2016, an increase in purchases and a further cut in the deposit rate.