European Central Bank head Mario Draghi has all but promised more monetary stimulus for the 19-country eurozone economy at Thursday’s meeting of the bank’s governing council. Now the question is, exactly how much will he deliver—and how much effect will it have?
Expectations at a minimum are that the ECB’s governing council will cut the deposit rate for funds from commercial banks even farther below zero, a step aimed at pushing banks to lend, AP reported.
And the ECB, the top monetary authority for the countries that share the euro currency, could also increase its bond-buying program, which pumps newly printed money into the economy.
The reason for more stimulus would be to boost dangerously low inflation. Since the council’s last meeting, inflation has sunk even farther below the bank’s target of just under 2%, to an annual rate of minus 0.2%. A reading that low is a sign of economic weakness and some experts fear it could become ingrained, weighing on growth in the longer-term.
Much depends on whether the ECB’s efforts work. If Europe’s modest recovery falters, it would add to the drag on the global economy from slowing growth in China.
Yet doubts are growing among economists about whether central banks around the world are reaching the limits of what they can do.
Stimulus Fails
Draghi is having no success convincing stock investors that the ECB has the firepower to reignite growth.
While all economists in a Bloomberg survey expect the central bank to cut interest rates when policy makers meet Thursday, and 73% project them to boost the amount of money put into the financial system through bond purchases, fund managers aren’t optimistic about a post-decision equity rally.
In the first year of quantitative easing, the Euro Stoxx 50 Index fell 17%, and volatility reached levels not seen since 2008. The gauge has dropped in each month but one following an ECB meeting since April.
“It won’t be easy for Draghi to bring back confidence in the recovery,” said Andreas Nigg, head of equity and commodity strategy at Vontobel Asset Management in Zurich. “Growth and inflation in Europe remain stuck at low levels and earnings revisions continue to fall. The market needs better earnings revisions and better economic surprises. ”
Even after the central bank pumped about €720 billion ($794 billion) into the region, manufacturing dropped to its lowest level since 2013, the inflation rate turned negative, and consumer confidence worsened. That’s led analysts to slash profit-growth estimates amid the worst earnings letdown since at least 2007. Investors are pulling money out of European equities at the fastest pace since 2014.
