The European Central Bank is set to leave the interest rates on hold at an historic low on Thursday amid signs that the struggling Euro Zone was facing another difficult year.
Analysts expect the Frankfurt-based bank will mark its first meeting of 2014 by holding borrowing costs at 0.25 per cent after trimming the rates by 25 basis points in November.
But since then, further evidence has emerged of weak economic growth, poor liquidity conditions and the risk of deflationary pressures.
This follows the release this week of figures showing annual inflation posting a surprise fall to 0.8 per cent in December. This was down from 0.9 per cent in November.
Stronger euro
A stronger euro is also adding to the pressure on the Euro Zone economy as it is struggles to remain on a growth track after emerging from a protracted recession last year.
Last month’s fall in the cost of living pushed consumer prices further away from the ECB’s target of an annual inflation rate of just below 2 per cent.
Deflation risks
ECB chief Mario Draghi has repeatedly rejected suggestions that the Euro Zone faced a risk of deflation.
But he is expected to face a round of questions at his regular press conference following the bank’s interest rate announcement for details on the ECB’s plans for the coming months to shore up confidence in the Euro Zone.
In particular, financial markets will be hoping for signs of consensus among ECB’s policymakers on the action it could take.
This could include another cut in its benchmark refinancing interest rates, fresh measures to boost bank liquidity as well agreeing to a negative deposit rate, which is the rate for commercial lenders who park excess cash at the ECB.
Latvian central bank chief Ilmars Rimsevics also will take his place at the ECB’s governing council meeting, after his country became the Euro Zone’s 18th member state on January 1.