A straightforward cut in the ECB's main refinancing rate to 0.1 percent from 0.25 percent - or more complex changes to existing market programmes - are other possibilities.
But there has been little sense that a majority of officials favours imminent use of any of those tools even though inflation has been below 1 percent for six months. Instead most may prefer to keep such policies on standby in case of an external economic shock.
"Policy rhetoric should lean in the direction of dovish. But it is unlikely that current economic and market conditions meet the watermark for ECB action," said Lena Komileva, managing director of G+ Economics.
With inflation across the euro area dropping to just 0.5% last month, and prices actually falling in several countries, the governing council is under renewed pressure to act.
They also have the stern words of Christine Lagarde ringing in their ears. Yesterday, the IMF chief warned that the risk of "a prolonged period of low inflation, particularly in the eurozone" was a key threat to global stability.
Lagarde insisted that:More monetary easing, including through unconventional measures, is needed in the euro area to raise the prospects of achieving the ECB's price stability objective.
The ECB does have several tools at its disposal (as president Mario Draghi often points out):
- It could cut its headline interest rates again (which would mean banks were charged negative rates for leaving money with the ECB)
- It could stop 'sterilising' bond purchases made during the height of the eurozone crisis, which would inject more liquidity into the system
- It could develop a new programme to drive lending to small eurozone firms
- And, potentially, it could launch a QE-style stimulus programme - last week, the head of the Bundesbank appeared to soften Germany's opposition to this.
But despite fears that eurozone is sliding into a Japan-style lost decade, few analysts believe the ECB will take action today.
"Not so long ago, the pundits and the investors saw the “emerging markets” — a euphemism for China, India, Brazil, and some others — as the rescuers of the world economy. They were the ones that would sustain growth, and therefore capital accumulation, when the United States, the European Union and Japan were all faltering in their previous and traditional role as the mainstays of the world capitalist system.
So it is quite striking when, in the last two weeks of January, the Wall Street Journal (WSJ), Main St, the Financial Times (FT), Bloomberg, the New York Times (NYT) and the International Monetary Fund (IMF) all sound the alarm about the “collapse” of these same emerging markets, worrying in particular about deflation, which might be “contagious.” It sounds like barely contained panic to me.
First, a word about deflation. A “calm” market is one in which nominal prices do not go down, and only creep up slowly. This enables sellers and buyers to predict with reasonable confidence what decisions are optimal for them. World markets have not been calm in this sense for some while. Many analysts date the decline of such calm from the 2008 turn in U.S. mortgage markets. I myself see the decline of such calm as beginning in the period 1967-1973 and continuing ever since.
The market is not calm if there is either significant deflation or significant inflation. These are really the same thing in their impact on real employment figures and therefore on world effective demand for production of all sorts. Whether real world employment goes down for one or the other reason, there is both acute real suffering for the vast majority of the world’s population and a vast increase in uncertainty, which tends to freeze further productive investment, which leads to more suffering and more freezing. It is a vicious circle." Immanuel Wallerstein February 3rd 2014.
No need to guess who will end up paying for deflation.
So it is quite striking when, in the last two weeks of January, the Wall Street Journal (WSJ), Main St, the Financial Times (FT), Bloomberg, the New York Times (NYT) and the International Monetary Fund (IMF) all sound the alarm about the “collapse” of these same emerging markets, worrying in particular about deflation, which might be “contagious.” It sounds like barely contained panic to me.
First, a word about deflation. A “calm” market is one in which nominal prices do not go down, and only creep up slowly. This enables sellers and buyers to predict with reasonable confidence what decisions are optimal for them. World markets have not been calm in this sense for some while. Many analysts date the decline of such calm from the 2008 turn in U.S. mortgage markets. I myself see the decline of such calm as beginning in the period 1967-1973 and continuing ever since.
The market is not calm if there is either significant deflation or significant inflation. These are really the same thing in their impact on real employment figures and therefore on world effective demand for production of all sorts. Whether real world employment goes down for one or the other reason, there is both acute real suffering for the vast majority of the world’s population and a vast increase in uncertainty, which tends to freeze further productive investment, which leads to more suffering and more freezing. It is a vicious circle." Immanuel Wallerstein February 3rd 2014.
No need to guess who will end up paying for deflation.
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