ECB Monetary Policy Decision In Focus

deflaOn Thursday the ECB’s governing council will convene in Frankfurt and likely undertake a looser form of monetary policy to help stimulate growth in the 18 member euro area and make efforts to confront falling inflation levels after months of indecision.

The latest inflation figures for May released yesterday by euro-stat for the 18 member euro area showed inflation was just .05 percent, missing the estimate of .06 percent,  lower than 0.7 in April, and solidly stuck below the ECB’s target of below but close to 2 percent.

In May euro stat reported that growth in the 18 member euro area measured by GDP (Gross Domestic Product) grew only 0.2 percent during the first quarter of 2014.

Even with those weak economic numbers the euro is still holding firm and is trading at 1.36, closer to its 52 week high of 1.39 than its 52 week low of 1.27.

The unemployment level in the euro-area continues to remain high an uneven with high unemployment levels in the regions of Southern Europe, most notably in Greece (26.5 percent  in February) and Spain (25.1 percent).

According to yesterday’s unemployment report from euro-stat, there was an 11.7 percent unemployment rate across the euro-area in April, down slightly from 11.8 percent in March.

The lowest unemployment rates were recorded in Austria (4.9 percent) and Germany (5.2 percent).

Economists are expecting the ECB to cut its main  interest rate below 0.25 percent on Thursday while bank overnight deposit rates could even turn negative at the ECB, a move that is intended to spur more greater lending and investment across the euro area.

The ECB’s current overnight deposit rate is 0 percent.

Some economists have thrown cold water on the hope that cutting overnight deposit rates will amount to greater investment and lending across the euro area, citing latest figures from the ECB that show that only around €30 billion from banks is kept at the ECB’s deposit facility, considerably lower than the €700 billion range in 2012 during the euro area crisis and long-term refinancing operation (LTRO) that involved the ECB providing financing to euro area banks that have largely repaid the borrowed money from the ECB since 2012.

At €30 billion there is not enough liquidity, even if all of it were disbursed towards lending, to generate the type of growth that is needed in the euro area.

As an alternative or addition to negative overnight deposit rates, the ECB could embark on another round of long-term refinancing operation (LTRO) to maintain a greater cushion of liquidity for banks holding illiquid riskier assets.

-Johnathan Schweitzer

 

 

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