ECB likely to announce extension of asset purchases in December, unlikely to cut policy rates

The European Central Bank continues to be concerned about political risks and about the health of parts of the euro banking sector that might have a possible negative effect on the policy measures’ effectiveness to boost the economy.

Markedly, the level of non-performing loans in Italy is more than the euro area average, whereas concerns regarding Deutsche Bank have emerged. In all, annual growth in euro area’s private sector loans has been rebounding in the last two-and-a-half years; however, it continues to be weak by longer-term historical standards.

With the latest speculation of tapering, the European Central Bank President Mario Draghi’s upcoming press conference in October would be awaited eagerly, said Lloyds Bank in a research note. The central bank is unlikely to announce any policy change in October; however, the governing council might further discuss stimulus options to be spoken about during the December meeting.

The talks are expected to focus on whether to formally extend purchases beyond March 2017 and when technical alterations might be important to safeguard there is enough amount of assets to purchase.

Given risks on the downside to the economic growth outlook and worries regarding weak underlying inflation, the ECB is anticipated to announce an extension of asset buying worth EUR 80 billion per month for another six months, added Lloyds Bank. It is unlikely to further cut policy rates.