The EU authorities had finally decided is time to act: for the first time in almost 2 years, a summit comes out with an active answer to the region crisis. Among all the voices that claimed for an answer, Mario Draghi, ECB’S president, has stated during the last bank meeting, that EU leaders should not wait for more emergency help from the central bank to solve the debt crisis rattling the region and instead make the political choices needed to strengthen the euro. He got his answer; could he stand on hold again this time? Not according to the experts polled by FXstreet.com for this special report.
"Now is a good time for an interest cut by 25 bp
" suggests Adam Narczewki, who gives this move a 75% chance. The majority analysts whom we have asked for their opinion on the outcome of the upcoming ECB meeting also believe this would be the best strategy for stimulating the ailing EU economy.
"A rate cut was already on the cards last time and some members have hinted that this will the outcome," reminds Yohay Elam. Alberto Muñoz points out that ECB's failure to proceed with a rate reduction might cause "a strong sell off" in the market
as it would "consider that the ECB is a useless institution with not power enough to face the current Eurozone challenges."
Steve Ruffley is the only analyst among those polled for the special forecast report to strongly express his doubts about the central bank’s willingness to ease rates in July. "Why would they?" he says adding that "a 25 base point rate cut is not going to miraculously cure the sovereign debt woes of Spain and Italy and it is not the ECB's job to prop up ailing nations with stimulus
. That is the job of the individual member states," he concludes.
The ECB will communicate its monetary policy decision on July 5 at 11:45 GMT. Read below full forecasts of the market experts.
Clemente De Lucia - Economist at BNP Paribas:
"During the crisis, the ECB Governing Council made it clear that what drives the ECB’s standard actions – i.e. decisions on key policy rates - is its assessment of medium-term inflation prospects. Over recent months, inflation has been easing and sluggish economic prospects signal that inflation will continue declining going forward. Given the poor state of the economy, wage, cost and price pressures will remain moderate over the forecast horizon. In particular, wage growth will remain subdued, with Germany probably the only exception. At 11%, the unemployment rate has reached its highest level since the launch of euro. Under the current economic environment, labour market conditions will continue to deteriorate. The conditions for further interest rates cuts over the coming months are therefore in place. The refi rate might be reduced by 50bp before the end of Q3. However, interest rates are already extremely low, and this will reduce the impact of further cuts. Nevertheless, many credit institutions are still highly dependent on ECB liquidity. Cutting the interest rate will therefore reduce their liquidity costs. An interest rate cut could reduce somewhat tensions in the market. Nevertheless, ECB actions can not solve eurozone underlying problems. Structural problems require structural solutions which can be provided only by national authorities and EU leaders."
Steve Ruffley - Analyst at Tradermaker.com:
"With higher inflation rates still prevalent and poor economic data coming from many of the core Euro zone countries there is a case for the ECB cutting its main benchmark refinancing rate in June. I however believe that there will be little in the way of additional rate cuts arguing more that the ECB may continue to signal its willingness to support political attempts to improve growth through stimulus but falling short of a firm commitment to cut rates. Last month's meeting gave Draghi a prime opportunity to signal further monetary easing, instead the governing council merely ignored such a bias, choosing a more hawkish rhetoric regarding tools such as the SMP bond purchasing scheme. Easing the range of securities it accepts from euro-zone banks in exchange for ECB loans last week has set the stall for where the ECB are heading, and to us it is not into the land of 0% rates.
Why would they? A 25 base point rate cut is not going to miraculously cure the sovereign debt woes of Spain and Italy and it is not the ECB's job to prop up ailing nations with stimulus. That is the job of the individual member states."
Yohay Elam - Analyst at Forex Crunch:
"There is a good chance that the ECB will finally move and cut the rates. Falling inflation in Germany will likely remove the Bundesbank's objection. A rate cut was already on the cards last time and some members have hinted that this will the outcome. The struggling economies of the euro-zone certainly need a rate cut in the current conditions. If Draghi indeed announces a rate cut, this will probably be cheered by the markets and boost the euro. Another non-action by the ECB will hurt the common currency."
Nicky Ong - Co-Founder of Traders Corner:
"With yields in the Eurozone periphery at elevated levels and risk appetite subdued, investors are looking to the central bank to take action. I believe the decline in commodity prices and consequent fall in inflationary pressures means a 25bp rate cut is a possibility at the ECB’s next meeting on July 5th. However, unlike their U.K and U.S counterparts I do not expect any introduction of new non-standard measures. Eurozone governments are working towards the fiscal rebalancing necessary to tackle the uncertainty in the region, but this process is likely to take time. Therefore, easing of monetary policy coupled with a detailed growth compact and plans for fiscal integration is important as it buys the Eurozone a much needed period of calm."
Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:
"The Eurozone debt crisis is hitting the market and the ECB needs to act in order to restore confidence and decrease risk aversion. Inflation declined but this is not the main reason why I expect more this time from the ECB. Greece is still an unsolved case plus Spain is 'threatening' investors. Now is a good time for an interest cut by 25 bp and I give it a 75% chance. This move would not only reduce the volatility on the Eurozone debt markets but also increase the chances for growth. Of course, this would not solve the problems and risks would remain although an interest rate cut would be short-term market mover."
Ilian Yotov - FX Strategist and Founder at AllThingsForex:
"Following the Fed's decision to offer more easing by extending Operation Twist, the ball is now in the European Central Bank's court. The FOMC gathering was the first meeting by a major central bank following the Greek election and ahead of the EU summit. As such, the Fed's monetary policy decision could serve as a policy-guiding decision for other central banks that could follow the Fed's footsteps. This is why it will not be surprising to see the European Central Bank (and other central banks) in in easing mode. The Euro-zone economic growth is still nowhere to be seen and the future of the euro looks more and more uncertain as the euro-area's third and fourth- largest economies get engulfed by the debt crisis. The European Central Bank has three options: buy more bonds, consider LTRO 3, or cut rates. As the threat of recession looms over the Euro-zone economy and with the EU debt crisis escalating, either one of the above options looks likely to be deployed soon, but neither one will be euro-positive."
Layalee Ramahi - Strategic Manager at ICN.com:
"The ECB was clear last meeting and I certainty stand behind Draghi there is no use of new measures if the monetary stimulus is severed from deepening banking crisis. The ECB can cut rates even as a concentrated move to lift confidence which is the main purpose I look for now and show focus on worsening growth outlook. I would love to see more liquidity pumped into the market which is most critical at this time. The deposit rate is the key to look at near zero which remains a risk to take and shows the ECB is willing to walk ahead and especially as the banks remain tense and the risky environment is controlling the banks that are hoarding cash at the ECB still."
Alberto Muñoz - Forex Analyst at FXstreet.com:
"In the last ECB meeting, Mario Draghi said there were “increased downside risks” to growth, which it's a clear sign that the ECB has changed its position and it's ready to act. In fact, if the ECB does not cut rates in its next meeting, the market could start a strong sell off (USD up, risk assets down) as it would consider that the ECB is a useless institution with not power enough to face the current Eurozone challenges. On the other hand, a July interest rate cut would be welcome as it would help banks in the peripheral countries, which are borrowing heavily from the ECB so it would contribute to ease current conditions in the European credit markets."
Valeria Bednarik - Chief Analyst with FXstreet.com:
"I believe ECB actions will depend on the EU summit outcome. If the European authorities actually come with a plan (something quite surprising considering previous summits) to form a fiscal union, with details on applications, and a signed agreement, the ECB will try to avoid moving rates. If the EU summit fails to provide confidence to markets, there's little the ECB can do later to recover it: a 0.25% rate cut could then be expected, but euro gains will likely be short lived afterward, as the root of the infection will remain intact."