The spectre of deflation gripping the Eurozone hangs over European Central Bank policymakers meeting today and may even push them into fresh action to boost the bloc’s weak economic recovery. A fall in Euroland inflation to 0.7% last month – far below the ECB’s target of just under 2.0% – highlighted the risk and has led some in the market to predict a reduction of 10/15bps on Thursday in the key refinancing rate, currently at a record low of 0.25%. <p>
Emerging Market turmoil will also be high on the 24-member Governing Council’s agenda since, if it forces the euro higher, that could put more downward pressure on prices. If the January inflation fall is not enough to prompt a policy response from the ECB today, policymakers may be swayed by updated economic projections from the bank’s staff in March. <p>
<b>It is a close call as to whether we get further monetary easing today. Our view is that the ECB will hold off a bit longer before moving again, but when it does it may choose other options rather than a minor rate cut which would have very limited impact.
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