ECB ponders rate cut to spur on eurozone

THE European Central Bank (ECB) is poised to unveil fresh stimulus to combat the deepening economic malaise gripping the region.

Markets expect policymakers to announce an interest rate cut on Thursday or at least change guidance to tee up stimulus at the bank’s next meeting in September. The ECB is expected to be spurred into action by stalling growth in the eurozone as a factory slump intensifies and forecasters slash their global growth estimates.

A cut to borrowing costs would push its deposit rate deeper into negative territory amid growing expectations the ECB will also have to reboot quantitative easing, halted only in December.

Germany has led the slowdown. Its economy has struggled to cope with an industrial downturn triggered by the car industry’s troubles, China’s slowdown and rising uncertainty caused by Brexit and the trade war. Italy has had another mild recession, while inflation expectations for the region collapsed to record lows, adding to stimulus hopes.

Economic outlook “remains rather weak and inflation is significantly below target”, said Morgan Stanley economist Daniele Antonucci. He believes the ECB could announce QE II as soon as the fourth quarter this year: “We could already get an announcement or a strong indication this autumn with [ECB president Mario] Draghi, with [nominated president Christine] Lagarde then formalising and implementing the buying programme.”

Investors believe the probability of a rate cut to minus 0.5pc at this week’s meeting is on a coin flip. Negative rates mean banks pay to keep their money with the central bank, encouraging them to lend. The ECB is expected to unveil a tiering system alongside the next cut to mitigate the negative effects of the policy on the banking sector.

The ECB could reportedly tweak its inflation target to help revive inflation.

A rethink on the inflation target would be “significant” for markets as it reduces the risk of the ECB removing stimulus prematurely, said Antoine Bouvet at ING.

The Dutch bank believes Mr Draghi could “try to surprise financial markets”. It added: “We expect the European Central Bank to change its forward guidance ... and effectively pre-announce a package of new measures at the September meeting.”