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The
bank, which left interest rates unchanged in a widely predicted
decision, is expected to say the chances of missing its
medium-term inflation target have increased due to lower oil
prices, weaker growth in China and an appreciating euro.
But it is also likely to argue that its 1 trillion euro-plus
asset-buying program is working, albeit slowly, and that the
time is not yet right to take further policy action, even though
it has the power to expand purchases.
During his 1230 GMT (8.30 a.m. EDT) news conference, ECB
President Mario Draghi is expected to announce new GDP and
inflation forecasts and discuss issues including China's
economic slowdown, asset purchases and the ECB's second cut in
Emergency Liquidity Assistance (ELA) to Greece.
The ECB launched its 60 billion euro ($68 billion) per month
quantitative easing program in March to boost consumer prices
after a short bout of deflation.
But nearly all key price drivers have been working against its
efforts to bring inflation, now running at 0.2 percent, back to
its target of just under 2 percent.
Oil prices are down 35 percent since May, iron ore is near an
all-time low, the euro has unexpectedly firmed and Chinese
growth, already a worry for the ECB in July, is slowing sharply.
One of the bank's favored gauges of inflation expectations, the
five-year, five-year euro zone breakeven forward, has fallen
below 1.7 percent from 1.85 percent in July.
The International Monetary Fund argued on Thursday that the ECB
should consider extending QE, citing a rise in downside risks to
the global economy due to a combination of threats, including
China's slowdown and rising market volatility.
'WILLINGNESS TO ACT'
A majority of analysts polled by Reuters expect the bank to
eventually extend or increase its asset purchases. Three
quarters said the bank has simply run out of tools and that
adjusting QE, scheduled to run until next September, is its only
viable option.
"Even if it appears too early to expect them to announce
additional quantitative easing, central bank President Draghi
should consider a more dovish rhetoric in order to prevent
inflation expectations from falling further," Credit Agricole
said in a note to clients.
Peter Praet, the bank's chief economist, has said markets should
not doubt the ECB's "willingness and ability" to act. But
comments from other rate setters like Benoit Coeure and Vice
President Vitor Constancio suggest the bank will want to take
time before taking action and prefers steady policy for now.
The ECB will also argue that the drop in oil prices will impact
inflation only temporarily and that while near-term forecasts
are cut more, the impact on 2017 inflation, earlier seen at 1.8
percent, will be more limited.
"Given the increasing uncertainty surrounding China, the ECB’s
wait-and-see mode will likely be characterized by heightened
alertness to external events," UniCredit said.
"We expect ECB President Mario Draghi to respond to this more
challenging environment with a strong commitment to further
easing if price stability were to appear threatened."
EU Financial Affairs Commissioner Pierre Moscovici played down
the risks, predicting in an interview with Italian newspaper La
Stampa that growth would become more robust.
"We have seen how monetary authorities, above all in China, have
reacted well and have the tools to continue to do so," he said
in the interview, published on Thursday.
"In such a context we can benefit from low energy prices,
growth-friendly interest rates, while reform efforts by European
governments are bearing fruit and create better conditions for
growth."
The ECB will also be keen to highlight some of the positive
impacts of QE, even as inflation has stayed below 2 percent
since early 2013.
Lending to euro zone firms in July grew at the fastest pace
since early 2012, unemployment fell and the composite purchasing
manager's index unexpectedly rose, offering a glimmer of hope
that growth may be picking up after a lackluster second quarter.
The bank may also argue that the impact of China's market
volatility on the euro zone is limited and that the modest rise
in yields on the euro zone's periphery amid a wider rout shows
the bloc is in better economic health than at any time in years.
(Additional reporting by Silvia Aloisi in Milan; Writing by
Balazs Koranyi; Editing by Catherine Evans and John Stonestreet)
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