Thursday preview: ECB widely expected to increase QE

The European Central Bank is expected on Thursday to announce fresh stimulus measures to address prolonged low inflation, a stagnant recovery in the euro area and a global economic slowdown.

ECB Governor Mario Draghi in January said the central bank would review its monetary policy stance at its March meeting when the latest macroeconomic projections become available.

The market is pricing in a 10 basis point cut to the deposit facility rate, a six-month extension to the quantitative easing programme and a €10bn increase in the pace of monthly asset purchases.

“Most are also expecting the ECB to increase its QE programme, but it may have problems here given that it has already drained the market of most qualifying eligible assets, according to John Rathbone at independent financial risk management consultancy J.C Rathbone Associates.

“The most that the QE programme might be increased by would be additional monthly purchases of €10bn. Whether the market will regard this level of monetary easing as representing a big enough bazooka is questionable.”

The ECB is under mounting pressure to take action after data last week showed the euro area slipped back into deflation in February due to a sharp decline in oil prices. The consumer price index dropped 0.2% last month, well below the ECB’s target of just below 2%, which the central bank has missed for three consecutive years.

While the ECB is widely expected announce a boost to its QE programme following the policy meeting on Thursday, the central bank has disappointed in the past. In December, the central bank was expected to raise monthly asset purchases but opted against the move.

“Draghi wouldn't dare disappoint again would he?,” said Mike van Dulken, head of research at Accendo Markets in a note to investors on Wednesday.

“The fact that European futures held up so well overnight is, in our view, reassuring in itself, suggesting optimism that a mix of bold action and soothing rhetoric will give bullish sentiment the fillip it needs after understandably waning lately.”

Thursday 10 March

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