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Journalism of Courage
The European Central Bank meeting on Thursday is the prime event for markets seeking clarity on the bank’s response to a stalled recovery, disappearing inflation and the sluggish pace of reform in the euro zone.
Inflation in the euro 9.6 trillion economy dropped to a fresh five year low of 0.3 per cent in August and as the months fly by, the bloc’s cushion against Japan-style deflation is getting smaller and smaller.
Increased geopolitical risks from the intensifying conflict in Ukraine forced Europe to impose sanctions on its third biggest trade partner Russia, a move which dented the faltering economic rebound even further.
“Pressure for the ECB to do more has returned, not only because of weak output / inflation data, but mostly following (ECB’s President Mario) Draghi’s speech in Jackson Hole,” said Frederik Ducrozet, senior euro zone economist at Credit Agricole.
Draghi struck a new, for some a groundbreaking, tone trying to cajole European governments into agreeing a common approach to reforming their economies — a drive he sees as necessary to allow the stagnant euro zone to grow with verve.
He will have a hard time selling his message. Countries like the euro zone’s second and third largest economies France and Italy are not growing and lag behind significantly with reforms.
So the ECB may have to reach deeper into its policy toolbox, with some analysts even betting on an interest rate cut at the bank’s meeting on Thursday.
“We expect the ECB to cut all key interest rates by a further 10 basis points, thereby delivering a larger negative deposit rate (-0.20 per cent) as well as a refi rate even closer to zero (0.05 per cent),” Nomura wrote in its global market research.
Beyond the euro zone, the week is packed with monetary policy meetings, with Sweden’s Riksbank, the Bank of Canada, the Bank of Japan and the Bank of England all taking the stage. The latter will be closely watched as investors seek guidance on the timing of an expected tightening.
Although no policy action from the Bank of England is foreseen on Thursday, it is still expected to be the first major central bank to lift interest rates when it makes a move early next year, just ahead of the US Federal Reserve.
A string of data about the health of manufacturing in the euro zone countries and Britain will shed fresh light on how European businesses feel about their prospects amid the deepening crisis in Ukraine.
In North America, the calendar will be dominated by Friday’s US jobs report for August, after the Fed suggested in its last minutes that the recent good economic news makes it more inclined to raise interest rates sooner. Markets see a US rate hike coming in spring 2015.
