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Draghi May Abstain From Adding Stimulus As ECB Keeps Vigil On Italy

Draghi May Abstain From Adding Stimulus As ECB Keeps Vigil On Italy
3/6/2013 5:31 AM ET

The European Central Bank is unlikely to announce fresh stimulus on Thursday despite the deteriorating economic conditions in Eurozone, as it watches the political deadlock in Italy, while the latest economic projections from the bank are likely to reveal further downward revision to the growth forecast, boosting speculation for a rate cut later this year.

At its monetary policy meeting in Frankfurt, the central bank is likely to leave the benchmark refi rate unchanged at a record low 0.75 percent for an eighth consecutive month.

The ECB Governing Council led by President Mario Draghi, however, is likely to discuss rate cuts with major economic indicators pointing to no let up in the ongoing economic downturn, at least in the near term.

On Thursday, the central bank will also release the latest staff projections. Economists widely expect a downward revision to the growth and inflation outlook, which will restart discussions of a possible rate cut in the coming months as well as of other policy options such as non-standard measures.

In its Winter Forecasts released last month, the European Commission said the Eurozone economy may enter a second year of recession in 2013. The commission now expects the economy to shrink 0.3 percent this year, in contrast to its November forecast of 0.1 percent growth.

In the fourth quarter, the gross domestic product shrank 0.6 percent, the most since 2009, pushing the economy deeper into recession.

"We expect the Governing Council to discuss rate cuts and at the press conference we believe Mario Draghi is likely to open the door for a rate cut in the coming months," Frank Oland Hansen, a senior economist at Danske Bank, said.

In a speech last month, Draghi suggested that the central bank is in no hurry to exit stimulus as inflation is anticipated to come significantly below the bank's target this year, giving room for maintaining an accommodative monetary stance.

Meanwhile, continued political uncertainty in Italy has reignited fears of another round of market turmoil. "With potentially months of political and economic deadlock ahead, we continue to expect rising market pressure sooner or later to force Italy to request some form of bail-out," Ben May, an economist at Capital Economics, said.

May noted that given the uncertainty about the likely outcome, the economic situation is unlikely to improve in the interim. He added that with further fiscal slippage looking more likely and the possibility of more populist economic policies eventually being adopted, the government bond yields may to continue their upward trend.

by RTT Staff Writer

For comments and feedback: editorial@rttnews.com

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