ECB easing, U.S. jobs data in focus

Sat Nov 28, 2015 11:35pm EST
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By Balazs Koranyi

FRANKFURT (Reuters) - The world's two biggest central banks will move decisively in opposing directions next week, with the ECB almost certain to ease policy on Thursday and a U.S. jobs report likely to seal the case for a Fed rate hike in December.

Building a solid case for more easing on fears of anemic inflation, the European Central Bank has all but committed itself to action, with the markets now guessing only about what exact steps it will take to kick-start price growth.

Still, there is plenty of room for surprises. The ECB will contemplate a wide range of measures, from a fairly uncontroversial deposit rate cut to more extreme - but highly unlikely - moves such as buying rebundled non-performing loans to resurrect bank lending.

"With expectations high, the risk of disappointment is also high but as concerns are correctly focused on the structural headwinds to the inflation outlook, there is really no point in holding back or saving ammunition at this stage," Societe Generale said in a note to clients.

ECB President Mario Draghi has done his share to raise expectations. He has warned about increased risks to growth and inflation, and said "we will do what we must" to raise inflation as quickly as possible.

A Reuters poll of more than 50 economists predicted that the ECB would opt for a deposit rate cut to -0.3 percent from -0.2 percent, an expansion of its asset buying program to 75 billion euros per month from 60 billion euros, and an extension of that buying beyond September 2016.

There are a range of variations on this pattern, though. The ECB could opt for a deeper deposit rate cut, or it could add assets like corporate or municipal debt to those that it buys. It could even set a staggered deposit rate, punishing those who park large amounts of cash in its vaults.

The biggest complication to all this is the small but significant group of opponents to such action, led by Bundesbank chief Jens Weidmann and board member Sabine Lautenschlaeger, who broke ranks with their Governing Board peers recently to openly oppose further easing.   Continued...

European Central Bank (ECB) President Mario Draghi adddresses the European Banking Congress at the Old Opera house in Frankfurt, Germany November 20, 2015.  REUTERS/Ralph Orlowski