ECB Rate Decision - What are the factors involved?

ECB Rate Decision Data Eurozone CPI 0.5% annual Eurozone PPI -1.7% annual Eurozone GDP growth 0.2% in Q4 2013 (-0.4% annual) ECB projected for 2014: GDP growth 1.2% Price inflation 1.0% Policy options Lower the deposit rate The cost of borrowing is not the problem in the Eurozone, European banks are not lending because they are building up balance sheets ahead of stress tests and because the structural reforms have not happened in many countries that would encourage the economic activity that would lead tp business borrowing. Quantitative easing The US has engaged in massive QE and has almost no consumer price inflation so there is no proof it would actually inflate prices. The policy would also quite likely need constitutional approval in Germany to be allowed. Considerations The data points to a slow recovery in the last three months of 2013 which slowed further in the 4th quarter. The governing council of the ECB expects the pace of price increases and economic growth to recover in the second half of the year. European countries are seeing record low yields on government bonds so there is no need to buy bonds to drive down yields. The euro is at multi-year highs, the ECB are concerned about its strength and the effects on European exports. The options the ECB have for bringing it down are ‘jawboning’ ie talking about the exchange rate being too high with the threat of action, or actually acting by easing policy. Conclusions The ECB is unlikely to ease policy while they expect a pick up in the European economy. The question is how close do the numbers have to get to zero before the ECB acts?