Low European Inflation Could Force ECB to Cut

A year after Mario Draghi said European Central Bank interest rates had reached bottom, euro zone money markets are discounting a fair chance they could be lowered again – regardless of rising interest rates across the Atlantic.

The low bank-to-bank lending rates further highlight the divergence of monetary policies in Europe and the United States, where markets see a one in four chance the Federal Reserve may hike rates for the first time in a decade on Thursday.

Analysts calculate the probability that markets attach to another ECB rate cut at about 20 percent. But even the bias in direction shows unusual defiance of Draghi’s policy guidance.

The new market leaning comes on the back of a weakening in the inflation outlook despite the ECB launching a trillion euro bond-buying program in March to pump new money into the economy.

Also, at the last ECB meeting, Draghi showed openness toward an expansion of the quantitative easing (QE) program. Vice President Vitor Constancio told Reuters in an interview that the ECB has scope to buy more assets. But no policymaker has signaled any new interest rate move.

Market rationale is a deposit rate cut from the current level of minus 20 basis points could be more effective than increasing QE in depreciating the euro, which has strengthened again in recent months, keeping inflation near zero.

via Reuters

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