A critical few weeks for the global economy will begin on Thursday when the European Central Bank (ECB) decides whether to take fresh steps to boost growth and stimulate inflation in the 19-country eurozone.
Financial markets are convinced the ECB’s president, Mario Draghi, will announce cuts in interest rates and a stepping up of the bond-buying programme known as quantitative easing (QE) after its latest policy meeting in Frankfurt.
The likely move comes as Janet Yellen, chair of the Federal Reserve, dropped broad hints that the US central bank would raise US borrowing costs later this month for the first time since the global financial and economic crisis began more than eight years ago.
Some analysts believe the sharply different strategies being pursued by the ECB and the Fed threaten a period of global financial turbulence.
David Marsh and Ben Robinson of the Official Monetary and Financial Institutions Forum thinktank said: “The great monetary polarisation between the US and Europe is under way. After a period of close alignment since the collapse of Lehman Brothers in September 2008, US and European monetary policies are about to diverge in dramatic fashion.
“The message from 70 years of monetary history is that, in the next few months, there is a roughly 50% chance of large-scale foreign exchange upheaval,” they said.
The eurozone economy has been growing modestly in 2015 and unemployment has been coming down slowly, but the ECB is concerned about the low level of inflation. Latest data showed consumer prices rising by just 0.1% in the year to November, unchanged on October.
Analysts say that Draghi has three options open to him: to cut interest rates deeper into negative territory, to expand the QE programme from its current €60bn (£42bn) a month, and to extend the programme beyond next September, when it is due to end.
Jack Allen, European economist at Capital Economics, said: “Ahead of the ECB’s policy announcement, the question is how, rather than if, the governing council will loosen monetary policy. We expect an increase in the monthly pace of asset purchases from €60bn to €80bn, as well as a strong signal that the programme will last beyond next September.”
Allen said he expected the ECB to cut its deposit rate from -0.2% to -0.4%. Draghi is likely to face opposition on the ECB governing council, particularly from Germany, which does not believe more QE is appropriate.
In the aftermath of the ECB’s announcement, attention will be focused on the foreign exchange markets, because QE tends to stimulate the economy by driving down the exchange rate and so boosting exports.
However, this would come at a time when the prospect of a rise in US interest rates has strengthened the dollar.
