“OITA, Japan—On the day of a closely eyed European Central Bank policy meeting, a Bank of Japan board member warned of the risk of Europe slipping into chronic deflation, adding that slower growth in Europe could muddy the prospects for global growth.
The remarks by Takehiro Sato on Thursday highlight the divergence in the trajectory of inflation in Japan and the euro zone, a difference that will likely play out in their central banks’ respective policy choices.
The BOJ doesn’t need to “make adjustments” to its current policy at present amid an absence of risks coming into play but the central bank is “carefully observing if Europe will fall into Japan-style deflation” and what action it takes, Mr. Sato said. He declined to suggest what, if any measures, the ECB might implement….”
“FRANKFURT–Thursday’s ECB meeting is shaping up to be one of the most important in recent years. The bank’s president, Mario Draghi, put financial markets on high alert for June action four weeks ago when he said the ECB was “comfortable acting next time.”
Other officials have since struck a similar tone. Time is running out. Annual euro-zone inflation weakened last month to just 0.5%, far below the ECB’s target of just below 2%. Grim economic reports have led to widespread expectations that the ECB will unveil a package of stimulus measures Thursday but stop short of large-scale asset purchases.
What will the European Central Bank do Thursday?
The ECB is widely expected to reduce all three of its key interest rates, on deposits, normal bank loans and emergency lending by 10-15 basis points (though it could go a bit more on the emergency rate because that is the highest of the three). That would bring the main lending rate at which banks can tap the ECB for cash–currently 0.25%–close to zero. The deposit rate, currently zero, would turn negative (see the chart below to see why that’s necessary). The ECB may also extend its policy of making unlimited loans available to banks well into 2016 and unveil a targeted lending program to help steer money to the private sector.
Is there anything else in the toolkit?
Other possibilities include a suspension of its weekly absorption of bank funds–called sterilization–under a previous bond-purchase program. That would add as much as €165 billion to the banking system. It could also do more on the liquidity side by making cheap loans available at long maturities with no strings attached or announce their intention to buy some asset-backed securities at a later date.
Which of these is the biggest deal?….”
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