Inflation has fallen to levels that have not been seen since 2009, leading to expectations that the ECB will act this month to quell fears of deflation.
Stephen Macklow-Smith, strategist and manager of JPMorgan European Growth and European Income Investment Trust, said: "It’s possible the ECB will decide to trim interest rates at the margin, but the danger of such an action is the potential for unintended consequences for money market funds and a contraction in short-term liquidity markets.”
He added that one alternative for ECB president Mario Draghi is another LTRO to keep money market interest rates from rising to a level that triggers deflation.
In a note to investors, bank Barclays indicated that it expected a looser monetary stance to be adopted at the December meeting, but the ECB’s intentions to be aired at this meeting.
Martin Harvey, fixed income fund manager at Threadneedle Investments agreed that any intervention resulting from today’s meeting is likely to be verbal. He said: "The policymakers could, for example, say that “inflation risks are to the downside” rather than the current view that inflation risks are “broadly balanced”. This would provide an important signal to the markets and highlight an imminent policy response."
The Council could also extend forward guidance to highlight the inflation threshold. Harvey said: "The Council have been uncomfortable with such suggestions in recent months, but a signal that rates will remain low until CPI is above 1.5%, for example, is an option. It would have the effect of pushing bond yields lower." Macklow-Smith believes that this kind of forward guidance is a real possibility.
However, Harvey is not optimistic of a robust response. He said the ECB may even wait until the December meeting to say something. "The response is unlikely to be as aggressive as is required and the situation in Europe, and especially the periphery, bear comparisons with Japan’s deflationary experience. For all the gains in competitiveness, nominal GDP growth that is curbed by falling prices will put further pressure on ever-rising government debt-levels. That will become a problem at some point,” he said.
