Close call on ECB rate cut, analysts predict

The European Central Bank is unlikely to cut key interest rates on Thursday, following better-than-expected data in the last few days, but the decision will be a close call, analysts said. After the ECB held borrowing costs at their current all-time lows at its last policy meeting a month ago, a number of central bank watchers had been betting on a rate cut this month given the worryingly low level of inflation in the 18 countries that share the euro. Nevertheless, the spectre of deflation -- the destructive spiral of falling prices in which consumers put off purchases, thus destroying salaries, jobs and investment -- is being kept at bay. And that could stay the ECB's hand for one more month, analysts said. The latest data compiled by the EU's statistics agency Eurostat put area-wide inflation at 0.8 percent in February, the same level as in January. While that is admittedly still way below the ECB's target of just under 2.0 percent, it was fractionally better than the 0.6 percent that many economists had been predicting. "We think the ECB will continue to underline it is has options for further easing, but hold off using them unless the recovery takes a turn for the worse," said Tom Rogers of EY Eurozone Forecast. "The main focus at the meeting will be on the staff's updated economic forecasts, and in particular whether inflation is likely to remain below target in 2016, thus potentially creating room for further monetary policy action in the coming months," Rogers said. "It is a close call this time," said Berenberg Bank economist Christian Schulz. "The ECB itself had considerably raised the odds of additional easing action by highlighting, in its last statement, the new inflation forecasts that it will publish at the March meeting. "But mostly positive data releases since February have weakened the case for action," Schulz said. "On balance, the data received since the last meeting do not warrant downward revisions of the inflation forecasts. The eurozone recovery is proving resilient to the emerging market troubles," he argued. - Action will depend on new inflation forecasts - Many ECB watchers believed the ECB's governing council held off cutting rates at its previous meeting in February in anticipation of its updated staff economic projections, also scheduled for publication on Thursday. Economists are concerned that some of the 18 countries that share the euro could find themselves slipping into deflation. But ECB chief Mario Draghi insisted last week that while eurozone inflation is low, he saw no danger of deflation. Even though current inflation rates "can clearly not be considered close to 2.0 percent... we are clearly not in deflation, which is defined as a self-reinforcing fall in prices that is broad-based across items and across countries," Draghi said. ING DiBa economist Carsten Brzeski said the divergence of market expectations on the outcome of this week's meeting suggests the ECB's communication is not functioning properly. "It looks as if the ECB's reaction function is still not as clear as Mario Draghi had us believe. In fact, many market participants still expect new ECB action this week, despite a virtually unchanged macro picture of a gradual but fragile recovery, and low inflation. "In our view, however, these expectations might not be met," Brzeski said. Natixis economist Johannes Gareis agreed. "We do not expect the ECB to cut interest rates going into March," he said. The ECB's 2016 inflation forecast was likely to be considerably higher than the 2015 forecast of 1.3 percent. "With the medium term inflation rate closer to the ECB's target, this could be enough for the ECB not to touch interest rates," Gareis said.