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Eurozone recovery picks up speed as ECB readies stronger stimulus

Hopes of interest rates cuts and a pumped-up quantitative easing scheme could boost the euro area recovery

ECB President Mario Draghi (left) has hinted that stronger stimulus could be on the way Photo: © 2015 Bloomberg Finance LP

The eurozone recovery has picked up speed, as a survey of the currency bloc revealed that businesses are growing at their fastest pace in six months.

The closely-followed euro area purchasing managers’ index (PMI) rose 0.4 points to 54 this month, defying the analysts who had predicted a weaker October figure.

Any number above 50 would suggest that the eurozone’s private sector was growing. This month’s strength was down to a good performance from the services sector, offsetting the China-exposed manufacturers of the eurozone.

Chris Williamson, chief economist at Markit, which compiled the PMI data, said that the figures brought “welcome news that the eurozone economy picked up some momentum in October”.

Despite the uptick, analysts still expect that the European Central Bank (ECB) will deliver additional stimulus to the euro area by the end of the year.

“The PMI remains at a level signalling a modest 0.4pc quarterly rise in GDP,” Mr Williamson pointed out.

He added: “The combination of relatively weak growth and deflation by the survey will fuel expectations that the ECB will step up its quantitative easing programme at the December meeting.”

The Markit report came as an ECB survey revealed that professional forecasters are less optimistic about the return of inflation over the next few years than they were just a few months ago.

Economists polled by the central bank said that they expected inflation to average just 1pc next year. Three months ago, economists said that they believed inflation would rise to 1.3pc in 2016.

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Inflation forecasts for 2017 were also revised down, reflecting current weakness in oil prices and the eurozone’s renewed flirtation with deflation – inflation fell into negative territory for the first time in sixth months in the year to September.

Mario Draghi, the ECB President, confirmed on Thursday that the central bank would reassess its monetary policy stance in December, after it had updated its economic forecasts.

“We are open to a whole menu of monetary policy instruments,” Mr Draghi said, indicating that the “discussion was wide open” on what the ECB could do next.

Financial markets are now pricing in an interest rate cut of a tenth of a percentage point in December, which would take the ECB’s deposit rate to -0.3pc.

Central bank watchers also believe that the ECB’s Governing Council could choose to extend the duration or increase the size of the quantitative easing scheme it announced in January.

“The ECB now seems largely committed to delivering more stimulus in December,” said Reinhard Cluse, a UBS economist.

If the central bank decided not to deliver, Mr Cluse warned the disappointment in the markets “might then be substantial”.

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This entry was posted on October 23, 2015 by and tagged , , , .

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