The ECB’s June 5 meeting is widely predicted to be a defining moment of the year, setting the tone for future monetary policy and potentially offering radical policies to help Europe’s ailing economy.
European consumer price inflation increased just 0.2% in the first quarter, according to the Organization for Economic Co-operation and Development, while growth might be stalling, coming in at just a 0.2% in the first three months of the year, the same as in the final quarter of 2013.
Given the disappointing economic situation, the consensus among the region's exporters is that the central bank needs to do something to weaken the euro. The common currency has traded in a range between $1.3350 and $1.39 since September, compared with around $1.22 in July 2012.
Since the first quarter of 2013, euro-area GDP has accelerated by 1.6 percentage points, but the contribution from net exports has decelerated by 0.4 percentage points, according to Deutsche bank data. That situation is in contrast to the recovery after the slump of 2008/2009, when export-dominated manufacturing – reflecting normalization in world demand – led the rebound.
This time, however, foreign demand is unlikely to come to the euro’s rescue, with weak Chinese growth and challenges in the US and elsewhere undermining that potential driver of recovery. Meanwhile capital is pouring into Europe after the normalization of the sovereign debt crisis and steady demand for bonds and equities.
Ahead of the ECB meeting, the mood music seems to be favourable to those seeking monetary accommodation.
ECB president Mario Draghi said in recent days the bank must be "particularly watchful" for any negative price spiral in the eurozone, adding "more pre-emptive action may be warranted" to guard against a drop in price expectations.
Draghi reiterated his view that although the eurozone faces a “prolonged” period of low inflation, and that deflationary expectations could “take hold”. The eurozone issues its May flash inflation data on Tuesday, with Reuters consensus estimate of economists forecasting a 0.7% year-on-year increase.
Meanwhile, monetary conditions elsewhere offer little solace for European exporters. Long-term US and Japanese rates this week hit the lowest level for a year, undermining potential carry trades.
All of which means the June ECB meeting has garnered an additional sense of importance, with many banks predicting the governing council will cut its deposit rate to below zero, effectively charging banks for holding their cash.
If that happens, it will be the first time that a leading central bank has crossed the threshold into negative territory.
Also possible is new long-term cash for banks to lend on to small and medium-sized firms, and new private asset purchase plans (to include ABS).
Despite hints by Draghi in recent weeks that a broad-based asset purchase programme – along the lines of the quantitative easing (QE) seen in the US and UK – is possible, few think it likely.
And analysts question whether the other measures alone will be enough to move the euro out of its elevated range, despite a slight weakening in recent days that moved it outside its 200-day moving average.
“The recent small sell-off we have seen in the euro has probably already priced in what we are going to see from the ECB,” says Maurice Pomery, London-based chief executive officer at Strategic Alpha.
“I don’t think they will do full QE yet and even if they cut the refi rate to below zero, it’s really more a gesture than anything that is going to have a major impact.”
Analysts at Crédit Agricole are among those echoing that sentiment, advising clients in a recent note against selling the euro “due to the heightened risk of the ECB disappointing elevated market expectations”.
Meanwhile, the bank reports that sellers of the currency are mainly private clients and hedge funds, suggesting upside risk should the ECB fail to deliver.
For European exporters waiting for the region’s currency to help them out of a hole, it appears they should not be holding their breath.