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Draghi Delivered Last Month, Can He Do It Again?

The European Central Bank (ECB) reassured financial markets last month that it was doing whatever it takes to end the euro zone debt crisis, now they want to hear what ECB chief Mario Draghi will do to tackle the region’s other pressing concern - an economy on the brink of recession.

Mario Draghi, president of the European Central Bank (ECB)
Hannelore Foerster | Bloomberg | Getty Images
Mario Draghi, president of the European Central Bank (ECB)

The ECB holds its monthly meeting and news conference on Thursday.

In September, the ECB unveiled a highly-anticipated plan to buy the bonds of those countries facing financial trouble once they sought aid from the euro zone’s bailout fund. Now the focus is on Thursday’s meeting - what Draghi will say about the economy and the potential for interest rate cuts, analysts said.

“Given that Draghi has done ‘whatever it takes’ to save the euro area, the focus will be on the interest rate outlook and whether we will get another round of LTRO,” said David Forrester, G10 fixed income strategist at Macquarie, in Singapore, referring to the ECB’s long-term refinancing operation program to provide cheap loans to banks that was launched earlier this year.

“The thing to look for is whether the ECB is willing to do more in terms of rate cuts,” he added. Forrester said a rate cut is likely before the end of the year.

“We expect a rate cut by December and I don’t think Draghi will rule that out today,” said Mitul Kotecha, head of currency research at Credit Agricole, in Singapore.

The ECB’s benchmark interest rate is at a record low of 0.75 percent and high inflation means the central bank has limited room to maneuver. Inflation in the euro area stood at 2.7 percent in September, well above the ECB’s target of just below 2 percent.

Under Pressure

The ECB is expected to leave monetary policy unchanged on Thursday, but as worries about the economic outlook grow, pressure on the central bank to take action is mounting.

A raft of weak data have led many economists to believe the euro zone economy fell into another recession in the third quarter and will not grow again until early next year. The 17-member euro zone economy contracted 0.2 percent in the second quarter from the previous quarter.

Data this week showed the euro zone unemployment rate remains at a record high of 11.4 percent, while a euro zone purchasing managers’ index for manufacturing rose to 46.1 in September from 45.1 in August, but remained below the 50 mark that divides growth from contraction for 14 months running.

“The central bank is faced with growing evidence of weaker growth,” said Kathy Lien, managing director at BK Asset Management in a note.

“What we will be listening for in ECB President Draghi's speech is whether he feels the slowdown in growth and the market's reaction to OMT is enough to warrant further action,” she said, referring to the ECB’s bond-buying program, or in ECB speak, Outright Monetary Transactions.

The program is aimed at lowering borrowing costs and ending the euro zone debt crisis.

For some ECB watchers, the central bank needs to signal that it is willing to go further than just cutting interest rates in order to kick start the economy.

“What the ECB really needs to do is embark on quantitative easing,” Shane Oliver, head of investment strategy at AMP Capital Investors told CNBC Asia’s “Cash Flow.” “What they have done is put a mechanism in place to buy bonds and that is positive, but they really need to do more.”

Many economists view quantitative easing or asset purchases, as an unconventional monetary policy tool that central banks resort to when cutting interest rates alone is not enough to boost economic growth.

The Federal Reserve last month unveiled its third round of quantitative easing to revive the U.S. economy.

By CNBC'sDhara Ranasinghe @Dhara CNBC

Contact Asia Economy

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