What to watch out for in today’s ECB rates meeting

As the euro zone’s fragile economic recovery struggles to gain momentum and the EU confronts political uncertainty in its biggest member states, the European Central Bank is pondering stepping up action that already includes record-low interest rates and precedent-busting asset purchases.

The big issue before the ECB’s governing council as it meets this morning are whether it should prolong or loosen the rules for its €80 billion a month quantitative easing programme. It will also consider its own latest economic forecasts, which aren’t thought likely to provide much relief.

The ECB will issue its formal statement on monetary policy at 12:45pm, Irish time. But more clues on how precisely the central bank may seek to boost the region's economy should come when ECB president Mario Draghi meets the press 45 minutes later at 1.30pm.

Here’s what to look out for in the hour-long press conference.

On hold

The ECB is widely tipped to keep interest rates on hold. In this scenario, the benchmark main refinancing rate will remain at zero and the deposit rate at minus 0.4 per cent. Nor is the central bank expected to alter its decision to buy €80 billion of mostly government bonds each month from now until at least March 2017.

But some analysts think the ECB could announce it will prolong the timeline for asset purchases beyond next spring. Others think it will hold fire for now, and announce an extension after its October or December vote instead.

One of the reasons why the ECB may delay a decision on prolonging QE is to give council members time to discuss how the bank could loosen the rules to expand the universe of eligible bonds.

If QE continues much past the spring, the council will have to remove restrictions such as the minus 0.4 per cent floor that limits the purchase of the most expensive sovereign debt. Or it could drop the commitment to buy bonds of member states according to the size of their economies. But changing either risks reviving spats between the governing council’s hawks and doves.

Forecasts

The ECB’s staff is set to present the latest round of its quarterly forecasts - the first since the UK’s vote to leave the EU . The post-Brexit forecasts are expected to show growth and inflation a little weaker than the June estimates predicted.

The June estimates forecast growth of 1.6 per cent in 2016 and 1.7 per cent in 2017 and 2018. Inflation would come in at 0.2 per cent this year, before rising to 1.3 per cent in 2017 and 1.6 per cent the following year.

Another reason why the ECB could hold fire is that the economy, both in the eurozone and in the UK, appears to have quickly adjusted to the Brexit shock.

ECB watchers will also be on the lookout to see how Mr Draghi views data that have come out since the June 23rd vote. Peter Praet, the ECB’s chief economist, has suggested that those figures indicate that the euro zone economy has to date largely weathered the fallout of the Brexit referendum.

"The data very much point to doing nothing," said Holger Schmieding, economist at Berenberg Bank. "Nothing has happened that would justify any headline-grabbing response from the ECB."

Exposed

While it has withstood the aftermath of the Brexit referendum so far, the eurozone’s recovery remains exposed to political risks in all four of the EU’s biggest member states.

There is plenty of scope for the divorce between the UK and the EU to turn messy or acrimonious, with the possibility that Britain’s access to the EU’s single market could be disrupted or downgraded: potentially bad news for exporters such as Ireland, Germany and the Netherlands.

Meanwhile, France and Germany both face national elections next year, with President François Hollande registering record low support and Chancellor Angela Merkel also seeing her popularity fall, although she is deemed much more likely to retain office.

Italy faces political uncertainty well before. Matteo Renzi, Italy's prime minister, has said he will resign if he loses a referendum on constitutional reform scheduled for November or December.

Mr Draghi may well face questions on how the ECB would respond to such challenges in the months ahead.

Copyright The Financial Times Limited 2016