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ECB Set to Signal Rate Cut as Economy Slows: Decision Day Guide

Most analysts predict that the Governing Council will change its policy language to set markets up for a September cut.

ECB Set to Signal Rate Cut as Economy Slows: Decision Day Guide
The euro sign sculpture stands near the former European Central Bank (ECB) headquarters in Frankfurt, Germany. (Photographer: Krisztian Bocsi/Bloomberg)

(Bloomberg) -- The European Central Bank is set to signal that it is once again preparing to step in to support the euro zone.

On the eve of the seventh anniversary of President Mario Draghi’s landmark “whatever it takes” speech, policy makers will decide how to confront an economic slowdown amid risks from U.S. protectionism to Brexit. Most analysts predict that the Governing Council will change its policy language to set markets up for a September cut in the deposit rate.

ECB Set to Signal Rate Cut as Economy Slows: Decision Day Guide

In deciding to act, the ECB would be following a wider trend of global policy easing from South Africa to India and Australia. The U.S. Federal Reserve is expected to join next week.

The Governing Council has indicated its readiness to respond in recent weeks. A move to usher in additional stimulus would mark a profound shift from the path outlined barely eight months ago, when officials capped the size of their bond-buying program at 2.6 trillion euros ($2.9 trillion) and investors started speculating when borrowing costs would rise.

The ECB’s policy statement will be published at 1:45 p.m. Frankfurt time. A press conference with Draghi and Vice President Luis de Guindos will follow 45 minutes later. Here’s what to watch for:

Interest Rates

The ECB’s deposit rate has been negative for more than five years and at its record low of minus 0.4% since 2016. The first step toward another cut is probably a change in the policy language that accompanies the announcement.

Currently committing to keep rates at “present levels” at least through the first half of next year, the Governing Council may introduce the phrase “or lower,” laying the ground for action. Officials could also decide to put more emphasis on the kind of progress they’d like to see on inflation, instead of tying interest-rate developments to a specific time frame.

What Bloomberg’s Economists Say...

“Draghi came into office with a bang, cutting interest rates at his first meeting, and he’s likely to go out with a bang too. We expect him to begin setting the stage for his final act... But we’ll probably have to wait until September for the real drama.”
--David Powell, Maeva Cousin and Jamie Murray. Read their
ECB PREVIEW

Mitigating Measures

Reporters are likely to quiz Draghi on how potential further rate cuts might affect the region’s banks. Financial institutions have complained for years that negative rates are hurting their profitability, and the risk is that they pull back on lending to companies and households as a result.

Deutsche Bank AG Chief Financial Officer James von Moltke said on Wednesday he’s “hoping and perhaps expecting” the ECB to announce a tiering system which would exempt some bank reserves from the charge.

Other central banks already have those kind of mitigating measures in place. While policy makers at the ECB have said they’re carefully monitoring the need to follow in their footsteps, so far they’ve insisted that the positive effects of negative interest rates outweigh the disadvantages.

Asset Purchases

Draghi may choose to signal the possibility of restarting asset purchases, either in the policy statement or in his press conference. Officials capped bond buying just last December, after accumulating more than a fifth of the region’s debt over the previous four years.

Opening the program again may require the ECB to change self-imposed rules that limit how much of an issuer’s bonds the region’s central bank can hold.

By the Numbers

The region’s economy took another battering in recent weeks, with German manufacturing deep in crisis and some of its biggest companies including Continental, Daimler and BASF issuing profit warnings amid flagging global demand. Draghi’s challenge will be to acknowledge the changed outlook without setting off a spiral of gloom.

Some good news he can point to came from euro-area consumers. Sentiment improved in July, and gauges for lending growth and activity in the services sector proved resilient.

Draghi’s Final Moves

Thursday’s meeting will be the third-last in Draghi’s term. His staff are in the midst of evaluating the ECB’s strategy and how it could be adjusted to ensure inflation becomes sustainably entrenched. The president could face questions on a Bloomberg report that he favors a specific 2% target with a “symmetric” approach, rather than the current goal of price growth just below 2%.

Such a shift would justify pursuing monetary stimulus for longer and set the stage for Christine Lagarde, Draghi’s like-minded successor who takes over in November after eight years leading the International Monetary Fund.

To contact the reporters on this story: Kristie Pladson in Frankfurt at kpladson@bloomberg.net;Carolynn Look in Frankfurt at clook4@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, ;Tom Contiliano at tcontiliano@bloomberg.net, Jana Randow

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