The ECB meets this week amid a dramatic tightening in financial conditions and collapse in the oil price while Italy’s decision to quarantine the whole country will affect 15% of Europe’s GDP. Analysts at ANZ Research expect interest rates to be cut, forward guidance to be enhanced and emergency liquidity measures.
“Whilst a rate cut from the ECB may do little to boost demand or ease supply difficulties short term, it is an important aspect of policy easing and can help to loosen monetary conditions. A 10bps cut from the ECB, which would take the deposit rate to -0.70%, has been priced in for this week.”
“Fiscal spending in Italy has typically had very little impact on raising productivity. Debt concerns in Italy may well return. We think this makes it all the more important for the ECB to act early and decisively, particularly concerning liquidity provision. Failure to do so could prompt a sharp rise in impaired and bad loans in Italy’s banking system.”