ECB Decision Day Guide From Low Inflation to Pausing Absorption

Here’s what to look for when the European Central Bank’s 24-member Governing Council releases its monthly interest-rate decision for the euro area at 1:45 p.m. and ECB President Mario Draghi holds a press conference in Frankfurt at 2:30 p.m.

-- Benchmark rate: 14 of 54 economists in a Bloomberg News survey predict a cut in the main refinancing rate today. Eight forecasters, including Morgan Stanley and Commerzbank AG, say the ECB will lower the rate to 0.1 percent from the current record low of 0.25 percent. Six, including BNP Paribas SA and Credit Suisse Group AG, predict a reduction to 0.15 percent.

-- Deposit rate: The ECB might also consider lowering the rate for keeping excess cash at the central bank overnight, currently at zero. Commerzbank is the only bank forecasting a cut, taking the euro-area into the little-explored land of negative rates. ECB Governing Council member Ewald Nowotny said on Feb. 18 that negative rates “may have economic effects and psychological effects” and should be “treated with great care.”

-- Inflation: The ECB will publish inflation and growth predictions for 2016 for the first time, with revised forecasts for 2014 and 2015, signaling whether current policies are averting the threat of deflation. While consumer prices in the euro area rose 0.8 percent in February, beating economists’ forecasts, that’s still less than half the ECB’s goal of just under 2 percent. Draghi has said there are no signs of deflation and that weakness is “mainly due to energy price” moves. Core inflation accelerated to 1 percent, and more than half of economists surveyed by Bloomberg from Feb. 10-14 said the ECB will look past a weaker headline rate if core inflation rises.

Liquidity Measures

-- Suspension of SMP drain: To inject liquidity into the market, the ECB could halt the sterilization of crisis-era bond purchases. Ending the absorption, in place since 2010 to soak up liquidity from the now-defunct Securities Market Program, would add about 175 billion euros ($240 billion) of cash to the euro-area financial system. Bundesbank President Jens Weidmann said on Feb. 23 he wasn’t against a suspension of the drain.

-- Reserve requirements: The ECB could lower or remove the reserve ratio, which is currently at 1 percent, to free up liquidity.

-- LTROs: Emergency loans are losing their effectiveness as they approach maturity at the start of 2015, prompting speculation that a new round may be offered. Another LTRO might look different from the previous ones, when banks used most of the liquidity to buy government bonds. “If we are to do an operation similar to the LTRO, we will want to make sure that this is being used for the economy,” Draghi said in December.

Untested Options

-- Asset-backed securities: Draghi has said that the ECB could support lending by raising the prominence of asset-backed securities in Europe. The central bank could buy ABS directly or start an initiative for banks to pledge more of the securities as collateral.

-- Quantitative easing: While purchases of government bonds by the ECB have proved controversial in the past, policy makers have stressed that they can be carried out without violating the central bank’s mandate if needed. The policy is used by the Federal Reserve, Bank of England and Bank of Japan.


-- Minutes: The ECB has started drafting trial minutes of its Governing Council meetings, according to two euro-region central-bank officials. A decision on the issue probably won’t be unveiled this month, the officials said.

-- Forward guidance: The ECB is expected to reiterate the forward guidance that it strengthened at its January meeting, when Draghi said that “the Governing Council strongly emphasizes that it will maintain an accommodative stance of monetary policy for as long as necessary.” It hasn’t tied its promise to hard economic data, unlike the BOE and the Fed.

-- Comprehensive Assessment: Draghi may be quizzed on the full methodology of the Asset Quality Review, the second stage of its bank balance-sheet review, which is scheduled to be unveiled next week. He will probably repeat that shedding light on banks’ health will restore confidence and set lenders up to support the region’s economic recovery.

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