Here are five questions for Mario Draghi today. The European Central Bank president holds a press conference at 2:30 p.m. in Frankfurt, 45 minutes after the Governing Council’s announcement on interest rates.
Is any further policy action likely for now?
No, according to economists. While Draghi left the door open to “little” adjustments after taking the benchmark rate to a record-low 0.15 percent and the deposit rate negative in June, all participants in a Bloomberg News survey say that the ECB’s three official rates will stay unchanged at today’s meeting. They also say that officials will keep borrowing costs on hold in coming months, with the majority of economists in a separate survey predicting a rate increase no earlier than 2016, and only one in 28 analysts foreseeing a further cut in the deposit rate.
One centerpiece policy of the central bank’s stimulus announced in June has yet to take effect. The ECB’s program of long-term loans for banks aimed at channeling as much as 1 trillion euros ($1.3 trillion) to the euro-area economy will only begin in September and officials have indicated they will refrain from further action until the impact of this is clear. While Draghi said in July that officials are intensifying preparations to buy asset-backed securities, analysts don’t expect an announcement imminently.
How strong is the economic recovery?
In July, Draghi warned of “possible repercussions of geopolitical risks” on the euro area’s “very gradual recovery,” and he may expand on this commentary in today’s opening statement in light of continuing hostilities in Ukraine and sanctions on Russia by the European Union and U.S.
For now, economic statistics and business surveys suggest a mixed picture in the past quarter, with Italy returning to recession while Spain grew 0.6 percent. In the region’s largest economy, Germany, factory orders dropped the most in more than 2 1/2 years in June, though a composite indicator of industrial and services activity across the euro region is close to highest level in this economic cycle.
An estimate of euro-region gross domestic product for the second quarter will be released on Aug. 14.
What is the outlook for inflation?
Inflation, which the ECB aims to keep just under 2 percent, has remained below 1 percent since October and fell to 0.4 percent in July, the lowest in almost five years.
The ECB currently predicts price growth will gradually strengthen over the next 2 1/2 years, climbing from 0.7 percent this year to 1.1 percent in 2015 and reaching 1.5 percent in the last quarter of 2016. It is scheduled to update that outlook in September.
Policy makers might take comfort from the fact that volatile energy prices strongly contributed to the drop in July’s inflation rate. Weak prices have more than offset the effect of the ECB’s low rates on the economy, and any downward revision to the current forecast of officials might prompt calls for further easing.
How is the ECB’s balance sheet review shaping up?
Portugal last week rescued Banco Espirito Santo SA, once the country’s largest lender by market value, in a 4.9 billion-euro bailout. While the move sparked memories of the euro crisis, the effect on that country’s sovereign bonds has been limited so far and analysts say contagion has been contained. Draghi may still face questions on the impact of the rescue on the ECB’s Comprehensive Assessment of balance sheets, as the bailout puts into focus the capacity of the euro-area’s banking union framework to withstand further bank failures.
What else is on the ECB’s agenda?
The European Central Bank’s own role in sanctions is focusing the minds of officials. The institution has sought clarification on whether the units of Russian banks operating in the euro area may access ECB funding after the EU sanctions, Bloomberg News reported on Aug. 1. That was after EU leaders curbed Russian access to bank financing and advanced technology in its widest-ranging sanctions yet.
In July, the ECB announced a reduction in the frequency of its rate-setting meetings to once every six weeks as of January when it starts publishing minutes of the Governing Council session. Draghi might be asked to shed further light on the format of these accounts.
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