ECB likely to cut deposit rates
March 6, 2016, 12:50 pm

European markets are hoping Draghi, right, will walk the walk on increasing stimulus this week [Xinhua]

The Eurozone inflation rate hovers around 0.1 per cent which is far below the ECB’s two per cent target for healthy economies.

According to data from the European Statistics bureau Eurostat, inflation actually fell to -0.2 per cent year on year in February.

It had risen slightly to 0.3 per cent in January.

Previous efforts by the ECB – including a pledge by its head Mario Draghi to increase quantitative easing and extend the stimulus program to March 2017 – have failed to significantly boost Europe’s economy.

Markets welcomed the March 2017 extension, saying inflation and GDP growth won’t pick up quickly enough by next year.

Although European markets have performed better in the past three weeks, low energy and oil prices have led to a shortfall in cash. Deflation and rampant unemployment in the Eurozone, coupled with dropping manufacturing data signal that the Eurozone is not in the best of health.

The ECB says its efforts have been hurt by the current energy glut and low oil prices.

Markets are readying for what will likely be yet another ECB monetary policy change to offset low commodity prices amid weaker global demand.

Exports to emerging economies, which have been hit hard in the past year, account to 25 per cent of all Eurozone exports.

Investors expect Draghi to announce at least another 10-point cut to deposit rates.

While interest rates will be kept at 0.05 per cent, deposit interest rates from commercial banks will be cut from -0.3 to -0.4.

This would mean that banks that hold money overnight at the central bank would have to pay for the service; it would, therefore, be in their benefit to encourage lending.

There is also a hope that Draghi will announce an increase of 10 billion euros to the ECB’s current stimulus program of monthly asset purchases.

The current quantitative easing plan involves the ECB buying back 60 billion euros ($68 billion) every month until the program terminates in March 2017 – a total stimulus of 1.1 trillion euros.

The BRICS Post with inputs from Agencies