(MENAFN- Khaleej Times) R now the ECB is in wait-and-see mode to assess the impact of the unprecedented stimulus measures it announced in June including taking one of its key interest rates into negative territory they said.The European Central Bank (ECB) is unlikely to take new policy action at its monthly meeting on Thursday despite a lingering threat of eurozone deflation and geopolitical risks analysts said.
For now the ECB is in “wait-and-see” mode to assess the impact of the unprecedented stimulus measures it announced in June including taking one of its key interest rates into negative territory they said.
Although the eurozone came out of recession last year and unemployment has fallen slowly the Ukraine crisis and Western sanctions against Russia present a wild card of uncertainty.
But despite worries over the East-West standoff and very low eurozone inflation data for July central bank-watchers did not expect the ECB and its chief Mario Draghi to announce new measures on Thursday.
“After the bold package announced in June the ECB is now in a wait-and-see mode” wrote Marco Valli of UniCredit Economics predicting a probably “fairly uneventful” meeting.
“The only meaningful change in rhetoric is likely to flag closer ECB monitoring of the downside risks from geopolitical tensions as tougher sanctions against Russia start directly affecting some so far limited sectors of the euro area real economy while uncertainty intensifies” he said.
For months the other major worry has been the possibility of a plunge into deflation or falling prices — a dangerous twist which deters businesses and consumers from spending in the belief they can wait and buy more cheaply later. If that happens demand suffers and companies put off investment hurting employment and setting off a vicious circle that can choke economic growth.
It is notoriously difficult for central banks to reverse deflation once the spiral has taken hold.
Data last Thursday showed that eurozone inflation in July dropped to 0.4 per cent. That was its lowest level since late 2009 in the aftermath of the global financial crisis and far off the ECB’s target of just below two per cent. Howard Archer of IHS Global Insight called the inflation data “a blow for the ECB”.
A silver lining was that the dip was mainly due to a year-on-year fall in volatile energy prices leaving core consumer price inflation stable at 0.8 per cent.
Archer said there was “a very real risk” that inflation could drop further although he added that “we still expect the eurozone to avoid overall deflation”.
“It certainly looks unlikely to move markedly higher any time soon barring an appreciable rise in oil and gas prices resulting from geopolitical factors hitting supplies” he said.
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