The European Central Bank is almost certain to ease policy next week as depressed commodity prices raise the risk of deflation, while a string of data from China will offer clues about the extent of the recent emerging market slowdown.
Growth in most key economies has slowed this year as states such as China to Brazil attempt to rebalance, weighing on global demand and sending deflationary waves around the world through sharply lower oil and metals prices.
Already struggling with ultra low inflation after years of crisis, the ECB has all but promised policy easing on Thursday but the devil will lie in the details.
A small 10 basis point cut to push its deposit rate deeper into negative territory is a foregone conclusion while some type of adjustment of the bank’s 1.5 trillion euro asset purchase program is also near certain.
But each option on the table comes with side effects and limited functionality as monetary policy is deep in unconventional territory, making exotic decisions less likely given the difficulty of aligning the interest of 19 countries and 25 policymakers.
“Negative Interest Rate Policy (NIRP) seems to be all the rage in central bank circles these days,” Morgan Stanley said in a note to clients, arguing that such policies do not actually help bank lending.
“There are concerns amongst investors that the negative deposit rate will undermine the effectiveness of the ECB’s quantitative easing,” Morgan Stanley added. “This is because it effectively introduces a tax on excess bank reserves, i.e., effectively a tax on QE itself.”
A small majority of analysts also expect a 10 billion euro increase in monthly asset purchases while others predict an expansion of QE into new asset classes or a fresh push for targeted long term refinancing operations.
The ECB could also remove its self-imposed limits not to buy bonds yielding less than the deposit rate, a contentious move as it would mean certain losses on some assets, while a range of technical changes are possible.
The outlook for the United States was brighter, with Friday’s non-farm payrolls figures easing fears that the world’s largest economy was heading into recession and potentially allowing the Federal Reserve to gradually raise interest rates this year.
However, China’s faltering outlook will remain a top concern for policymakers around the globe and investor focus will be fixed on the annual meeting of China’s parliament, which must try to engineer a huge economic shift toward services and consumption and away from basic manufacturing.
As around 3,000 delegates from the National People’s Congress meet in Beijing, a wide range of fresh data, including on reserves and trade, are expected to point to a further loss of momentum and capital flight, supporting expectations for more measures to prop up sagging growth.
“Government policy is being set to guide China along a narrow path: enough pain to force through reform and restructuring, close overcapacity, improve efficiency of investment, etc., but not enough to seriously damage job creation,” Commonwealth Bank said.
Foreign trade data are expected to make for somber reading, reflecting persistent weakness in demand at home and abroad which is holding back industrial production and keeping a lid on commodity prices.
Imports are seen down 10 percent in February, a improvement from a January’s 19 percent drop, while exports are seen declining by 12.5 percent following an 11.2 percent drop in January.
New lending is also seen lower after a surge a month earlier but money supply growth is seen steady, a figure closely analyzed by markets to gauge if China can arrest the slowdown in investments.
February foreign reserves data will also be closely watched, with most expecting a slowdown in the exit of funds after exceptionally high outflows in January.
“Capital is flowing out of China at an unprecedented pace,” Nordea analysts Amy Y. Zhuang said. “$850bn is estimated to have left the country since mid-2014.”
“Even huge FX reserves like China’s would seem insufficient if the pace of depletion continues,” Zhuang added.
The Bank of Canada also meets next week and will likely keep rates on hold, taking comfort in stabilizing global markets, a slightly better-than-forecast fourth-quarter GDP reading and a modest rebound in commodity prices.
British industry data are also expected to generate interest after output fell 1.1 percent in December, its sharpest monthly drop since 2012. January figures are expected to show a 0.6 percent increase, taking the annualized growth to 0.2 percent.