The eurozone will receive a fresh wave of stimulus this week, as the European Central Bank (ECB) cuts interest rates further into negative territory and pumps up its trillion-euro scheme of quantitative easing.
The policy moves are likely to hurt the profitability of some of Europe’s largest banks. Analysts said that more stimulus “looks like a done deal” this Wednesday, as inflation in the euro area has remained stubbornly below the ECB’s target of close to 2pc.
Mario Draghi, the ECB’s president, has given strong signals that more monetary firepower is on the way.
“The renewed decline in oil and commodity prices and its impact on inflation is having a negative effect on inflation expectations,” said Reinhard Cluse, an economist at UBS, which could make bringing inflation back up to target more difficult.
The ECB’s deposit rate, offered on funds held at the central bank overnight, stands at minus 0.2pc. Economists expect that this will be cut further, to minus 0.4pc.
It is believed that one option the ECB is considering would be the introduction of a “two-tiered” interest rate, to penalise lenders that deposit greater amounts at the central bank.
A similar mechanism has been used in Denmark, where central bank interest rates have been cut to even lower levels than in the eurozone. Analysts at BNP Paribas said that while the average bank would be made €2.2m (£1.6m) worse off by the change, the pain would be spread unevenly.
David Owen, of Jefferies, said that the system would act as a “Robin Hood tax”, penalising the rich, large and safer banks, which attract more cash, in favour of poorer and smaller lenders.
“Small banks with large excess reserves will be penalised by less than €1m, and large banks by more than €5m,” said Patrick Jacq, of BNP Paribas. Lenders in Germany, France, the Netherlands, Luxembourg and Finland are believed to be most vulnerable.
Eurozone policymakers launched a €1.1 trillion QE programme in March, purchasing €60bn of bonds a month, in a scheme that is due to run until next September.
When the buying began, inflation stood at minus 0.1pc, and has since climbed to 0.1pc. Central bank watchers believe that the ECB could continue purchases later into 2017, or increase the number and type of bonds that it acquires in a bid to boost prices.
Separately, the Confederation of British Industry reported that growth in the UK economy continued at a “steady” pace in the quarter to November. “The main risks to the UK economy still stem from outside,” said Rain Newton-Smith, the CBI’s director of economics.
The Bank of England has said that the UK’s weak recovery has in part been a result of eurozone malaise.