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 The ECB Governing Council meets in Brussels against the backdrop of
a Franco-German spat over ECB policy towards the euro's exchange
rate - one factor the bank's president, Mario Draghi, has identified
as a potential trigger for policy action.
Last month, Draghi outlined scenarios that could prompt the ECB to
act: a de facto tightening of monetary policy caused by market moves
like further euro gains, fresh trouble transmitting ECB policy to
all parts of the euro zone, or a deterioration of the inflation
outlook.
None of the scenarios appears to have materialized to a sufficient
degree yet to prompt ECB action.
The euro rise has stopped short of $1.40, the mark a Reuters poll of
economists suggested would prompt ECB action, banks expect to ease
credit standards to firms in the second quarter and inflation rose
to 0.7 percent in April from March's 0.5.
"I see a 20 percent chance that they surprise us with a rate cut,"
Nordea analyst Holger Sandte said of Thursday's meeting.
A Reuters poll published on Friday showed euro zone monetary policy
is likely to remain steady well into the future as a more
broad-based recovery takes hold while inflation has probably already
fallen as low as it will go.
With inflation running well below its target of just under 2 percent
over the medium-term, the ECB has nonetheless faced calls from
French politicians and the International Monetary Fund to do more to
buoy the euro zone economy.
Germany on Monday said the level of the euro was an issue for the
ECB but not politicians, indirectly criticizing French Prime
Minister Manuel Valls after he said the currency was "too high" and
that a "more appropriate" monetary policy was needed to bring it
down.
Markets are looking for any sign the ECB could embark on U.S.-style
quantitative easing (QE) - central-bank speak for money printing to
buy assets. They are likely to be waiting for some time.
Draghi raised the idea in an April 24 speech of a "broad-based asset
purchase program" if the inflation outlook worsens. But just a few
days later - at a meeting with German lawmakers - he played down the
prospect of QE any time soon.
The ECB chief did see "a problem of ongoing low inflation rates,
which could lead to measures", a source who attended the meeting
said, adding: "He mentioned quantitative easing in this context but
made clear that we're still some way off QE."
DIFFERENT BALLGAME
While the ECB is far from embarking on a broad asset-buying plan, it
is closer to readying a targeted funding operation that would seek
to encourage banks to lend to small and medium-size businesses, or
SMEs.
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Such an operation could see the ECB offer banks cheap, long-term
loans, or LTROs, in return for collateral in the form of bundled
loans to SMEs - a ploy that would aim to support the market for SME
loans packaged as asset-backed securities (ABS).
If banks responded to the offer, such a measure could give the
smaller companies that form the backbone of the euro zone economy
better access to credit and allow ECB policy rates to filter through
to them more efficiently.
The ECB supplied banks with over 1 trillion euros ($1.4 trillion)
in 3-year LTROs in late 2011 and early 2012, as the euro zone crisis
was choked lenders.
A targeted LTRO would lack the size, scale and impact of a major
asset-buying plan, and some analysts doubt whether it would do much
to address the low inflation gripping the euro zone now.
"The LTROs were very helpful at the time. Liquidity was needed in
the financial system," said Klaus Wiener, head of tactical asset
allocation and chief economist at Generali Investments Europe, which
manages $500 billion.
"But I think when it comes to really making a difference for
inflation and inflation expectations, I think it is more QE that
matters," he said. "I think it is a different ballgame now."
No ECB action this month would stoke market anticipation of updated
forecasts from the bank's staff, stretching through to 2016, which
it will publish after its June 5 meeting.
A downward revision of the inflation forecasts then would put
renewed pressure on the ECB to act, while an upward revision would
relieve some pressure.
($1 = 0.7205 Euros)
(Editing by Mike Peacock)
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