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ECB to turn back stimulus cranes to support economic economy

The European Central Bank will unveil fresh stimulus measures on Thursday to support the vulnerable economy in the eurozone, but its exact features are far from certain, and a decision that markets during the crisis are at risk of pushing up borrowing costs.

major central banks that ease monetary policy, Germany risks falling into recession and inflation expectations are slipping, ECB President Mario Draghi has all but promised more support and put all the bank's remaining tools into play.

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Some politicians have expressed unanimous, public opposition to more radical opposition. measures, especially the restart of bond purchases, known as quantitative easing.

In addition, Draghi's dovue has spoken to raise investors' expectations so high that it will be difficult to deliver them fully, so that the ECB risks disappointing. This could see market interest rates and the euro's exchange rate rise, rather than fall.

"There is considerable uncertainty about the scale of the expansionary measures the ECB will take today, and therefore there is great potential for strong fluctuations in euro exchange rates," Commerzbank's strategists wrote in a note to clients.

The single currency has fallen 3.5 percent against the dollar since the ECB began to signal a easing of monetary policy in June, while the return on many euro area government bonds has set new record lows.

While the ECB has a wide range of policy instruments available, each comes with complications, from dubious effect to major side effects.

The eurozone's biggest problems – a global trade war, Brexit and China's slowdown – are also outside the central bank's control, suggesting that any stimulus will have a limited impact.

Nevertheless, the ECB is expected to reduce some of the growth and inflation project

Sources told Reuters that forecasts would predict growth of not much more than 1 per cent both this year and next year, with underlying inflation rates and growth only modest.

The central bank aims at inflation in the euro area at just under 2 per cent, a target it has not been able to reach since 2013.


A cut in the ECB deposit rate of 0.4 per cent – already a record low – appears to be the least contentious move, and policy makers will discuss a 10 or 20 basis point reduction.

Although this would reduce short-term borrowing costs for companies, it would immediately hit the bank's profits, as negative interest rates mainly constitute a penalty cost of more than 1 trillion euros of excess reserves.

So the ECB is likely to exempt banks from part of this fee by introducing a multi-stage deposit rate.

Although this option would provide an immediate boost for banks, critics argue it would be small and would disproportionately distribute banks in France and Germany.

The ECB is also expected to further push out the timing of a possible rise in interest rates, providing "enhanced" guidance on interest rates that will link any move to certain inflation conditions, and reduce emphasis on calendar dates.

The ECB announces its interest rate decision at 1145 GMT, followed by Draghi's news conference at. 1230 GMT.


The most contentious part of the package will be whether or not to restart bond purchases.

Although this is the ECB's most powerful weapon, over half a dozen politicians, including the governors of Germany, France, the Netherlands and Austria, have expressed skepticism about the need for it.

They argue that the block is experiencing only a slowdown, not a recession, and such a tool should be reserved for real crises, especially since the ECB has already used up much of the firepower in previous rounds of stimulus.

Interest rates are at record low levels, and the ECB's balance sheet is more than a third larger than the US central bank, indicating a limited scope for more action.

But with the Fed dropping rates last month and sending some dovish signals about future policy, the ECB can hardly avoid keeping pace with stopping the euro from appreciating and further dampening inflation.

"Although we do not see much room for the ECB to disappoint interest rate cuts, forward guidance and strengthening, the board believes it may be less proficient than what is priced by delivering a less generous asset purchase program," Nomura said.

Draghi is still likely to vote if he wants to proceed with bond purchases, but opposition from the Block's largest economies could hurt the bank's authority.

Possible compromises include approving a relatively small bond purchase scheme without changing previously established purchase limits, to avoid stirring up a legally ontentious issue.


Another thing is that with Draghi's departure on October 31, some policy makers seem less concerned about making a long-term commitment that will tie their hands on the bank's next president.

"A compromise solution might be to announce QE but leave the details for later. This would buy more time for the ECB's governing council to reach a consensus and allow incoming President Christine Lagarde to" own "the program," said BNP Paribas economist Luigi Speranza.

(Reporting by Balaz's Koranyi; Editing by Toby Chopra and Mark Potter)

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