THE BLOG

It's Crunch Time at the ECB

28/02/2014 14:08 GMT | Updated 30/04/2014 10:59 BST

Much like sporting events can be histrionically promoted as 'crunch matches', 'the day of reckoning' or similar, recent meetings of the world's central banks have often been given a similar billing. However, it's safe to say that the impact of these economic planning meetings lasts longer than any bangs and scrapes picked up in a 90 minute kick about.

The upcoming European Central Bank meeting could easily be described as 'crunch match'. European news has once become a mix of the encouraging and infuriating. Recent inflation numbers from the Eurozone have heightened fears over the risk of deflation, something that ECB Chair Mario Draghi has continually dismissed.

Similarities between the Japanese economy and what is happening in Europe at the moment are easy to make. Japan's economy has been characterised for two decades by slow to non-existent growth, huge public indebtedness, low yields on government debt and falling prices. Compare and contrast that with the most recent data from the Eurozone and the hallmarks of the 'Japanification' of the Eurozone are there for all to see.

Last month's drop in CPI from 0.9% to 0.7% was not enough for the ECB to consider cutting rates this month, as core prices remained relatively stable. Draghi said as such last weekend; speaking in Sydney at the G20 the ECB Chair said that policy makers would add stimulus if the outlook for prices deteriorated further.

This month's estimate, released this morning, has thrown another spanner in the works. The latest data has shown prices are now rising by 0.8% compared to this time last year, a somewhat inconsistent number given the national make-up. Italian CPI was lower by 0.1% on the month, as was that of Spain and Germany. So unless we see French prices have risen by an extra 0.8% then something is very out of kilter.

Unfortunately for those of us who are looking for a reaction from the European Central Bank in order to get a real recovery going in the Eurozone, these releases are only likely to stay their hand. 19 of 63 economists polled by Reuters this week see the ECB eventually opting for some form of quantitative easing soon, that number is up from 8 last month, so it's not just us looking for some form of reaction.

What options are there for a bank with near zero interest rates anyway? The ECB could cut rates by another 10 or 15 basis points, but movements are likely inconsequential at the margin now. If the ECB wants to convince the European banking sector that it needs to lend more to consumers and businesses then it may consider charging banks to deposit cash with it. Once again, bank analysts suggest that banks would simply take the loss as opposed to risking capital with the possibility of default.

The situation calls for extraordinary measures - such as the ECB joining the Bank of England, Bank of Japan and the US Federal Reserve to buy assets (such as government bonds or packages of bank loans) outright to stave off the deflation threat. Draghi reiterated at this month's ECB press conference that rates will 'stay low for an extended period of time', but that is simply not enough.

The European economy needs massive monetary stimulus and pro-structural policy changes to stave off a 'lost decade'. There's no hyping that kind of result.

Jeremy Cook is chief economist at World First