In fact, some of the experts believe that there is a slight possibility of the central bank lowering interest rates from the current 0.5% level. "Should conditions in the money market tighten further, depressing activity, and weighing on inflation the Bank might act," Clemente de Lucia predicts. Alberto Muñoz believes that the ECB could make that move before the end of the year, "if things get worse" in the Eurozone.
Nevertheless, the majority of the contributing economists expect the ECB to maintain their policy unchanged in October and suggest that it will be rather Mario Draghi's post-decision press conference that will offer the markets some food for thought.
In the opinion of Alistair Cotton, the ECB president "is likely to continue to bang the forward guidance drum as loud as he can," reiterating that "rates will remain low for the foreseeable future." As Mario Draghi announced the ECB's readiness to offer banks more LTRO stimulus during his recent appearance before the European Parliament, he could repeat that option, which "could weaken the euro as it reflects economic weakness that calls for action," Yohay Elam speculates.
The ECB will announce their monetary policy decision on October 2 at 11:45 GMT. Below you will find the full forecasts of the contributing economists.
Yohay Elam - Analyst at Forex Crunch:"The ECB will probably leave policy unchanged at the upcoming meeting. Changing the forward guidance at this point would be pre-mature and would undermine the credibility of the central bank. Draghi could repeat the forward guidance pledge and express caution about the recovery. In his recent testimony in the European Parliament, Draghi clearly left the door open for another LTRO. While he is unlikely to introduce one at this moment, repeating the LTRO option could weaken the euro as it reflects economic weakness that calls for action. If he dismisses this option in the near future, the euro could benefit."
Clemente De Lucia - Economist at BNP Paribas:"A) Interest rates: According to the ECB forward guidance, the Bank will leave 'key policy rates at current or lower levels for an extended period of time'. The ECB guidance is conditional on the Governing Council view on inflation. For the time being, the Council sees the inflation outlook as subdued. Large spare capacity in the economy will continue to exert downward pressures on inflation, while energy and food prices should only add some volatility to inflation over the coming months, without altering its downward trend. Headline inflation should average 1.5% this year and 1.2-1.3% next year, largely below the ECB ceiling target for price stability. Under these conditions, the most likely scenario is that the ECB leaves policy rates unchanged over the forecast horizon.
Yet, although less likely, a policy rate cut cannot be completely ruled out. While at shorter maturity the excess liquidity is maintaining money interest rates at very low levels, this is not the case at the longer end of the curve, something that probably raises some eyebrows in the Frankfurt tower. Should conditions in the money market tighten further, depressing activity, and weighing on inflation the Bank might act.
B) Liquidity analysis: While decreasing, excess liquidity in the money market remains, keeping the Eonia close to the interest rates on deposit facility (DFR), currently at 0%. The possibility of early repayments of the two special 3 years LTROs has favored this process. However, if this process goes too far and the excess liquidity should drastically decrease, then some problems might arise. A significant reduction of excess liquidity might dislodge the Eonia from the DFR. A rise in short term interest rates would automatically tighten monetary conditions, something that the ECB does not want at all. For the time being excess liquidity is around EUR 240 bn, that is above the threshold (between EUR 200 and 100) where some tensions might emerge. The current pace of LTRO repayments (slightly more than EUR 2bn per week on average over the last three months) does not represent a real threat in the short-term. Yet, a liquidity cliff might occur when the two special operations mature in early 2015. The ECB might, then launch another special operation to avoid a sharp reduction of liquidity and a tightening of monetary conditions."
Alistair Cotton - Senior Analyst at Currencies Direct:"Draghi is likely to continue to bang the forward guidance drum as loud as he can at the October meeting. With the German election passing without a hitch the ECB will be looking to build on the positive momentum Angela Merkel’s victory provides, to press home that rates will remain low for the foreseeable future. We do not expect changes to the main interest rate. As such, the euro should remain pegged close to 1.35 against the USD with a lack of tapering from the FOMC countering a dovish ECB."
Steve Ruffley - Chief Market Strategist at InterTrader.com:"Draghi and the ECB have always maintained they still have room to manoeuvre and that they can always take additional measures when it comes to stimulus. I personally am sceptical about this and feel with the FED choosing not to reduce stimulus Draghi will do as little as he can to maintain the status quo in Europe. I think little will be said on forward guidance apart from, 'it’s not, not working'.
With Merkel re-elected it looks like business as usual in the EU, as so much money has been spent by Germany to prop up the Euro and Euro Zone, why would it stop now? Draghi has always been a step behind the FED so I expect no real inspiration or leading from the front, I see all noises that are made to be that of a wait and see nature and Draghi desperately trying to convince the world markets that the ECB still have an ace up their sleeve with respect to forward guidance if it is needed. I for one as a trader will be looking to call that bluff soon."