Last month's dive in euro zone inflation has put a European Central Bank rate cut back on the agenda, but with bank-to-bank lending rates already near zero, markets are struggling to see what difference it might make.
In recent months, further ECB cuts had all but been written off. Troubled economies were showing signs of stabilisation, the bank's main borrowing rate was at a record low and its deposit rate, which became more important when it flooded markets with ultra-cheap cash in the crisis, was at zero.
But after a couple of low-ball inflation numbers, the mood is switching towards a possible 25 basis point refi cut to 0.25 percent soon - albeit not this week according to a Reuters poll.
The question is whether a cut would make any difference.
The short answer may be no. The ECB has long complained its low rates are not getting through to euro zone trouble spots where worries about debt levels and lending to and by banks remain high.
For euro traders and for the money market rates that drive the prices of loans to firms and consumers, the greatest significance of a cut may be the signal the ECB sends.
Having been seen as in a neutral gear until last week, the shift back towards easing has changed the mood and caused a spike in FX market volatility.
The euro has dropped over 2 percent against the dollar over the last week as rate cut speculation intensified, but traders reckon it may need hints of more extreme measures for it to move to $1.30. It was at $1.35 on Thursday.
UBS is one of those forecasting a cut on Thursday, but Mansoor Mohi-uddin, head foreign exchange strategy, said options such as negative deposit rates, more long-term cheap loans or even quantitative easing would have a greater impact.
"These are instruments likely to be chosen as policies of last resort. But the risk of the ECB having to eventually consider such tools is set to keep the single currency under this year's highs," he said.
Source: Reuters
