The European Central Bank (ECB) surprised markets with a rate cut Thursday, and economists suggest that it may not be done.
The ECB unexpectedly cut rates by 25 basis points today to a record-low of 0.25%. BMO Capital Markets notes that ECB president, Mario Draghi, said that Thursday’s rate cut reflects the fact that the bank now expects “a prolonged period of low inflation”.
Scotia Economics says that the rate cut, “indicates that the increased risk of sustained low inflation has become a concern for euro area monetary authorities in view of a recovery that remains ‘weak, uneven and fragile’.”
And, in the wake of this surprise cut, economists are expecting rates to stay low for a long time. “With the Euro Area economy likely facing a prolonged period of weak growth and inflation, policy rates look to stay exceptionally low for a very long time,” BMO says.
Indeed, BMO reports that the ECB confirmed that monetary policy will stay accommodative for as long as necessary. In fact, it says that Draghi reiterated that even lower rates are possible.
Scotia says that the likelihood of a further liquidity injection in the near term is low. However, it also warns that the upcoming asset quality review and stress test of euro area banks “have the potential to introduce a new round of financial market volatility and political uncertainty, which could necessitate additional policy action.”