ECB set to extend monetary stimulus plan

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European Central Bank chief Mario Draghi has signalled that the ECB is ready to act to help boost the eurozone’s economic fortunes. But what could its new stimulus plan entail?

– European Central Bank chief Mario Draghi appears set to unveil a new round of monetary stimulus on Thursday as the ECB struggles to boost inflationary pressures in the eurozone and to fire up the region’s economy.

As part of the plan, the ECB is widely expected to announce a further cut in interest rates along with a move to extend its 1.1-trillion-euro (1.2-trillion-dollar) bond-buying scheme or quantitative easing programme amid an uncertain economic outlook.

“Draghi’s determination as shown at his public appearances combined with the underlying structural weaknesses in the economy and new uncertainties have made monetary inaction nearly impossible,” ING Bank economist Carsten Brzeski said.

Two weeks ago Draghi declared that the ECB would “do what we must” to ensure that the 19-member eurozone remained on an economic growth path and to drive consumer prices back up towards the bank’s annual inflation target of just below 2 per cent.

But data to be released on Wednesday is expected to show annual eurozone inflation stood at a mere 0.2 per cent in November compared with 0.1 per cent in October.

The plunge in oil prices, the eurozone’s lacklustre economic performance and the slowdown in key emerging economies such as China have helped to keep the lid on inflationary pressures.

Now, economists are concerned that the refugee crisis combined with a looming terrorist threat across Europe in the wake of last month’s deadly attacks in Paris could dampen consumer confidence in the region.

“Mario Draghi may have to deliver a large dose of easing as expectations run high and geopolitical uncertainty could add to downside growth and inflation risk,” Barclays Bank economists wrote in a note to clients.

The Frankfurt-based ECB currently expects annual inflation in the eurozone to come in at 1.1 per cent this year before rising to 1.7 per cent in 2017.

But ECB watchers believe Draghi will also announce on Thursday that the bank has lowered its inflation forecasts when he releases the bank’s latest projections.

In the meantime, the prospect of the ECB once again pumping more money into the currency bloc has helped to drive the region’s share markets higher while triggering a slump in the euro, which has lost about 12 per cent of its value since the start of the year.

The euro’s fall against the dollar has been accentuated by expectations that the US Federal Reserve will announce this month that it is moving in the opposite direction to the ECB and that it is hiking interest rates as it winds back its monetary stimulus.

The decline in the euro is good news for the ECB as a weaker currency helps to fuel inflationary pressures and bolster exports.

Analysts believe that Draghi will say on Thursday that the ECB has decided to drive its deposit rate deeper into negative territory with a cut of 10 basis points.

The ECB last lowered the deposit rate, which is the rate it charges banks for parking funds at the ECB, to minus 0.2 per cent in September last year.

By trimming the deposit rate again the ECB hopes to force financial houses to lend more money and consequently to inject more liquidity into the eurozone’s hard-pressed financial system.

Some analysts believe another option under consideration by the ECB could be to cut its benchmark refinancing rate from its current historic low of 0.05 to zero.

The refinancing rate is the rate at which the ECB lends money to commercial financial institutions such as banks and consequently helps to set financial market rates.

Since the asset purchase programme was formally launched in March, the ECB has splurged almost 600 billion euros on buying up mainly government bonds to help stir inflation and economic growth while freeing up credit markets.

Already dubbed as QE II by financial markets, the ECB’s new plan could involve boosting the monthly amount it spends on bond purchases under quantitative easing from 60 billion euros to between 70 and 75 billion euros.

Draghi is also expected announce that the ECB’s governing council has decided that the bond-buying programme will be rolled out beyond September, which was when it was due to be wound up.

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