ECB ready to cut rates and push banks into lending
In currency markets waiting the outcome of the ECB policy meeting at 18:45 THAI TIME and President Mario Draghi's news conference at 19:30 THAI TIME.
Economists in a Reuters poll expected the ECB to cut its main refinancing rate by 15 basis points to 0.10 percent and the deposit rate to -0.10 percent from zero.
The ECB is also thought likely to launch a refinancing operation aimed at funding smaller business across the EU, but to stop far short of the sort of quantitative easing embraced by the U.S., UK and Japan.
However, with so much already priced in to markets it could be difficult for policymakers to proffer a positive surprise.
"We continue to think that risks going into ECB are biased to the central bank underwhelming the market and are tactically positioned for a bounce in EUR/USD," cautioned JPMorgan strategist Niall O'Connor.
"The ECB's tone and message will be just as if not more important than the alphabet soup of policy announced -- does this represent a step change or a sea change for the ECB?"
Since ECB President Mario Draghi last month signaled the Governing Council's readiness to act in June, policymakers have come out in force to discuss the ECB's toolbox, feeding expectations that a broader stimulus package is in the making.
This is likely to consist of a cut in interest rates, which would push the deposit rate for the first time into negative territory and the offer of longer-term loans linked to further lending. Large-scale asset purchases remain a distant prospect.
Cutting the deposit rate below zero would see the ECB charge banks for parking their excess money at the central bank - a step it hopes will prompt them to lend out the money instead.
Economists in a Reuters poll expected the ECB to cut its main refinancing rate to 0.10 percent from 0.25 percent and the deposit rate to -0.10 percent from zero, on top of launching a refinancing operation aimed at funding firms.
They expect bank lending to rise as a result of such measures, but foresee only a marginal impact on the euro.
The euro has fallen about 4 U.S.-cents against the dollar since the ECB's May meeting, hitting $1.3586 last Thursday.
QE-BAZOOKA ON THE SHELF
Before taking any decision, the Governing Council will look at the June update of its quarterly staff projections. In March, they showed it would take 2-1/2 years for inflation to get near the ECB's target of below but close to 2 percent.
A deteriorating outlook is seen triggering action.
Euro zone inflation has been stuck in what Draghi has called "the danger zone" below 1 percent since October, mainly because of weaker commodity and food prices, but also because of wage and other adjustments in euro zone crisis countries.
The stronger euro exchange rate exacerbates these dynamics.
At the same time, record low interest rates are still not feeding through evenly to companies across the currency bloc. Companies in Portugal, for example, are paying on average 5.4 percent on loans compared with 2.2 percent in Finland or France.
This particularly affects smaller companies, which rely strongly on bank funding and make up the bulk of the economy.
A program that offers banks longer-term funds at a cheap rate if they can prove that they increase lending, combined with even lower interest rates, would aim to address these issues.
An extension of the ECB's unlimited provision of liquidity in its main refinancing operations beyond July 2015 would also give banks more assurance about future funding conditions.
A move to deploy so-called quantitative easing (QE) - money-printing to buy assets - remains some way off.
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