All eyes today turn to Frankfurt, with the ECB expected to act in response to rock bottom inflation - the latest reading showed an annual rate of just 0.2 per cent - and concerns about the euro zone economy. The difficulty for the ECB is that its main interest rates - the main refinancing rate - is already at a record low of 0.05 per cent. So it has had to turn to other measures. These have included a massive programme of purchasing of govenrment bonds - so called quantitative easing, or QE - and a cut in the interest rate it pays banks to leave cash with it overnight. This rate is already in negative territory, meaning the banks must pay the ECB to deposit cash for short period. This is designed to encourage them to lend cash out instead.
Here are the key things to watch today.
1. Will the deposit rate be cut again? Almost certaintly yes, increasing the cost for the banks to leave cash with the ECB - effectvely a cost to them when they hold cash in their balance sheets. The rate, currently minus 0.3 per cent, is expected to fall to at least minus 0.4 per cent and possibly minus 0.5 per cent. There is also some speculation that the ECB could tweak the way it applies this rule, offering a two tier system where banks will still get a return on some funds they deposit with it. It has faced criticism from some big banks for imposing a further burdern on them via negative deposit rates and this would ease the pain a bit.
2. Will it extent the QE programme? Opinion here is split. It is already buying a massive €60 billion a month in bonds - mainly government bonds - on the markets. Opinion is split on whether this will increase, as the ECB is already facing technical difficulties in getting hold of enough bonds. It could increase the monthly buys to €70 billion or , even€80 billion, or it could extend QE beyond its expected finish date next March.
3. Will there be any surprises? There is some speculation that the ECB could extent the time of assets it buys under QE, or extend a programme of providing long cost financing to banks. Much focus will also be on what president Mario Draghi says. He has repeatedly vowed to do “all that it takes” but the markets are starting to ask whether he is running out of bullets.
