Euro-Area Economy Slows as ECB Prepares to Drive Growth

Euro-area economic growth slowed to start the year, keeping pressure on the European Central Bank to act as soon as tomorrow to spur the fragile recovery and spark prices.

Gross domestic product in the 18-nation currency bloc increased 0.2 percent in the first quarter, down from a revised 0.3 percent gain in the previous three months, the European Union’s statistics office in Luxembourg said today. The first-quarter reading confirmed Eurostat’s initial estimate.

The ECB is battling a prolonged period of low inflation that threatens to derail the euro area’s stuttering recovery from a record-long recession. Policy makers have held out the possibility of a package of measures that may include negative interest rates and liquidity injection conditional on increased credit supply to companies.

“We see a significant risk of a fall below zero,” said Jennifer McKeown, an economist at Capital Economics in London, referring to the inflation rate. “While the ECB looks set to cut interest rates and announce some lending incentives after its meeting, we think that it will ultimately need to implement a large scale quantitative-easing program to counter the growing risk of deflation.”

Euro-area inflation slowed to 0.5 percent in May, and the rate has been below 1 percent for eight months. The ECB aims to keep inflation just below 2 percent over the medium term. The unemployment rate dipped to 11.7 percent in April, though it remained near a record high.

‘Fertile Imagination’

Of 50 economists surveyed by Bloomberg News, 44 expect the Frankfurt-based ECB to become the first major central bank to take interest rates into negative territory by cutting its deposit rate. All but 2 of 60 respondents said the benchmark rate, currently at 0.25 percent, would also be reduced.

“We are working on a broader range of instruments that might even strike the most fertile imagination of journalists or analysts,” ECB Executive Board member Yves Mersch said last month.

Possible actions apart from interest-rate cuts could include conditional longer-term loans for banks, extending the full-allotment mode for refinancing operations, reducing reserve requirements and changing its collateral framework.

In a Bloomberg survey last month, just 8 percent of economists forecast the ECB will start asset purchases, indicating they don’t see it following the Bank of England and the Federal Reserve down the quantitative-easing road this month.

The ECB will announce its interest-rate decision at 1:45 p.m. in Frankfurt tomorrow and President Mario Draghi will hold a press conference at 2:30 p.m.

Before it's here, it's on the Bloomberg Terminal.