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 The ECB is holding interest rates at record lows and printing money
to try to boost consumer prices, which fell by 0.1 percent last
month, pulling further away from the ECB's target of just under 2
percent.
That has prompted calls for the euro zone's central bank to expand
or extend the 60 billion euros ($68 billion) a month asset purchase
program it launched in March.
While stressing their readiness to act, the bank's policymakers have
said the fall in prices is largely due to energy costs, which the
ECB cannot influence, and that it is unclear whether a slowdown in
emerging economies will have a lasting impact on the euro zone.
Many also hope a fading of the base effect from 2014's oil price
plunge will help push inflation higher by year-end.
Their cautious tone suggests the ECB will wait until it gets new
inflation forecasts from its staff in December before deciding on
any change to its quantitative easing scheme. A broader debate
meanwhile appears to be taking shape within the bank about whether
monetary policy is already coming up against the limits of its
effectiveness.
Draghi is due to hold a press conference at 0830 ET.
"We think the ECB will signal that it stands ready to act if needed,
and that the door is open for further easing but more likely at the
December or January meetings," economists at JP Morgan said in a
note to clients.
Euro zone economic growth is slowing again, with even powerhouse
Germany seeing a recent string of poor data, and one of the ECB's
favored gauges of inflation expectations, the five-year, five-year
euro zone breakeven forward <EUIL5YF5Y=R>, has fallen to 1.7 percent
from 1.85 percent in July.
Lending surveys have continued to improve, however, providing some
ammunition for ECB President Mario Draghi to argue that QE is
finding its way into the real economy and does not urgently need to
be adjusted.
Draghi has said the ECB is prepared to intervene if risks to
inflation increase or financing conditions tighten, and has cited
the exchange rate as a key factor for price stability.
The single currency <EUR=> has strengthened since the last ECB
meeting in early September, due in part to the Federal Reserve's
decision to postpone its first post-crisis rate hike, and is
currently trading at $1.13.
"It seems that a euro/dollar at 1.15-1.20 may represent a sort of
'pain threshold'," said Marco Valli, chief euro zone economist at
UniCredit Research. "This implies that dovish rhetoric is very
likely to continue and, possibly, intensify this week.".
Thursday's meeting, which took place in Valletta, was the last for
two policymakers, Ireland's Patrick Honohan and Christian Noyer of
France, who are stepping down.
SCOPE TO DO MORE
ECB Vice President Vitor Constancio recently said there would be
scope for the ECB to ramp up QE, as its program is smaller relative
to the size of the euro zone economy than those launched by the Fed,
the Bank of Japan and the Bank of England.
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The median probability of the ECB extending QE beyond its current
September 2016 end-date stood at 70 percent in a recent Reuters poll
of economists. The same poll saw a 40 percent chance of increased
monthly purchases over the next six months.
Yet analysts have warned that upping the pace of purchases may
create a shortage of bonds down the line and that extending the
scheme may require the ECB to change some of the rules of engagement
to avoid hitting technical limits.
These issues, along with the ECB's failure to revive the market for
asset-backed securities, have raised the prospect of an expansion in
the range of assets that the ECB can buy to include corporate bonds
or even equities. But its direct involvement in private corporations
could meet political and internal resistance.
Markets currently see a 50 percent probability of a further cut in
the deposit rate from -0.20 percent, according to Morgan Stanley
estimates. Such a move was seen knocking down the euro, but would be
unprecedented and could damage the ECB's credibility as Draghi has
repeatedly said no more deposit rate cuts were possible.
The lack of obvious solutions and the diminishing effectiveness of
QE in driving up inflation raise questions about whether the ECB has
effectively exhausted its tools.
ECB governing council member Ewald Nowotny said last week that "new
instruments" were needed. He cited economic reforms, deeper European
integration and measures to stimulate demand, which was seen as a
reference to more expansive fiscal policies.
With monetary policy already ultra-accommodative and the euro zone
faced with structural challenges including an aging population, some
economists went as far as saying the ECB may eventually have to pare
back its ambitions.
"In a scenario of prolonged undershooting of inflation, the ECB will
need to be open to the idea of taking a longer time to meet the
target or reformulating the target," said Anatoli Annenkov, an
economist at Societe Generale.
($1 = 0.8849 euros)
(Editing by Catherine Evans)
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