Draghi to hold fire as Eurozone prepares for difficult summer season

Jake Cordell
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The sun may shine, but storm clouds are gathering over the Eurozone this summer
The sun may shine, but storm clouds are gathering over the Eurozone this summer (Source: Getty)

The European Central Bank (ECB) will edge closer towards extending its unprecedented stimulus package today as it enters a crucial period for the future of the single currency in the wake of the UK's Brexit vote.

President Mario Draghi is expected to issue yet another last ditch call for national governments to help join him in the battle to heave the Eurozone back into normality - higher inflation, rising salaries and robust growth. However, with his numerous calls to date for governments to implement structural reforms falling on deaf ears, experts predict he will have to pave the way for even looser monetary policy later this summer.

Read more: Eight city reactions to the Bank of England's shock decision to hold interest rates

"The ECB looks odds-on to sit tight," Howard Archer of IHS Global said. However, Archer and a string of other analysts said the central bank would be forced to do something in either August or September.

Later in the summer, Stephen Brown of Capital Economics said: "We expect the ECB to cut the deposit rate [from minus 0.4 per cent], increase the pace of its asset purchase programme [currently €80bn a month] and adjust the requirements of the programme to allow greater flexibility."

Read more: Eurozone heaves itself out of deflation - just

Danae Kyriakopoulou, top economist at the Centre for Economics and Business Research (CEBR) added: "The next few months will be critical for the Eurozone's future. We expect the ECB to move from its 'wait and see' stance to a more active one."

Capital Economics previously estimated if the UK voted to leave the EU it would lead to a 50-50 chance of the ECB unlocking so-called "helicopter money" in an extreme attempt to support the Eurozone economy.

With the Bank of England standing firm until at least next month and fears action from central banks are losing steam, the ECB is unlikely to act before Mark Carney slashes interest rates, probably next month.

Read more: Former MPC member Andrew Sentance on why the MPC was right to hold rates

Away from monetary policy, the Italian banking crisis is also expected to feature heavily at the meeting in Frankfurt today. Italy's banks have an estimated €360bn of bad loans - equal to about one-fifth of the country's GDP - which has led to the sector coming under sustained pressure in recent weeks and intense wrangling between Italian and European politicians over the legality of a potential government-backed bailout.

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