Softer data complicates European Central Bank guidance debate ahead of Thursday's monetary policy meeting

Jasper Jolly
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Mario Draghi will face investor questions on Thursday (Source: Getty)

Retail sales in the Eurozone slowed in April, adding to recent data which suggests the European Central Bank (ECB) could disappoint investors hoping for a change in forward guidance from its top economists on Thursday.

Retail sales volumes rose by 0.1 per cent in April, according to the European Commission, a fall from the 0.2 per cent expansion seen in the previous month.

Meanwhile, a measure of investor sentiment across the Eurozone hit record levels, but increases slowed, according to Frankfurt-based research group Sentix.

Read more: Draghi: Risks to the Eurozone becoming more "balanced" as ECB holds policy

The weaker than expected sales growth, along with stalling inflation, have raised concerns among investors that the ECB could put off publicly changing its risk outlook to acknowledge the strengthening European recovery.

The ECB will announce its latest monetary policy decision on Thursday at 12:45pm, with the bank’s president, Mario Draghi, facing the media’s questions at 1:30pm.

Investors will also be scrutinising Draghi’s every word for signs the central bank is moving closer to removing some of the central bank’s historically accommodative policy support.

“The evidence so far is that Draghi, until he starts seeing inflation, will remain cautious,” said Chris Bailey, European strategist at Raymond James.

Read more: ECB is less likely to loosen policy further, but cautious on tightening

“The critical thing to get out of this is what triggers Draghi will be looking for.”

The central bank has remained committed to its ultra-loose monetary policy since March 2016, when it cut its key interest rate, the main refinancing operations, to zero per cent, meaning it does not charge interest to banks borrowing money.

The bank has come under sustained pressure to raise interest rates as inflation has recovered, with some economists expecting the ECB’s governing council to remove a reference to “lower” interest rates in the future.

Read more: Eurozone unemployment falls to lowest in eight years (but inflation slows)

However, inflation fell back to an annual rate of 1.4 per cent in April and the core inflation rate, which strips out volatile food and energy prices, fell to only 0.9 per cent.

Draghi has repeatedly made it clear the ECB will only move to tighten its hold on the supply of money to the economy when it feels inflation is on a “sustainable” path to its two per cent target.

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