Europe News

When will ECB break the status quo?

Ralph Orlowski | Getty Images

While the government of the euro zone's third-largest economy, Italy, is facing collapse, and one of its biggest trading partners, the U.S. is in the midst of a partial government shutdown, the European Central Bank (ECB) looks as though it won't deliver any dramatic shocks when it meets in Paris Wednesday.

Cheap loans; interest rate cuts; flagging their next move even more clearly: all of these are options open to ECB President Mario Draghi as he navigates the choppy seas of the crisis hitting the 17 European Union countries that share the single currency.

The euro zone's economy is lagging behind the US and Asia countries in recovering from the 2008 financial crisis – only escaping recession in the second quarter of this year. Unemployment, meanwhile is still high at 12 percent.

One of the tools available to the ECB could be encouraging banks to lend more to businesses and families by releasing another load of cheap-rate low-interest loans to banks. This method has been used in the U.K with the Bank of England's Funding for Lending program.

But there is little evidence that the ECB's two previous long-term cheap loan programs – long-term refinancing operations (LTROs)– have filtered down into the euro zone's "real economy". Money market statistics suggest that this has mainly been used by banks to lend to each other rather than small businesses.

(Read more: What is an LTRO anyway?)

Lending rates for small to medium sized businesses in the more troubled euro zone economies in Greece, Italy and Spain often approach 4-5 percent in real terms - easily 150-250bp higher than those applied to SMEs in the core, as Erik Nielsen, global chief economist of Unicredit points out. This is "inappropriately tight… in countries struggling to get out of recession," he argued.

Still, the central bank responsible for most of a continent's financial health is likely to sit on its hands again when its rate-setting committee, the Governing Council, meets on Wednesday.

The council is not expected to make any move on its main refinancing interest rate, which has stayed at a record low of 0.5 percent since May – analysts seem to be universally certain that it will remain there. Inflation in the euro area hit a three and a half year low of 1.1 percent in September, well below the ECB's 2 percent target, according to figures released on Monday, which should back up the bank's current policy on interest rates.

(

There is also a small chance it may follow the U.S. Federal Reserve and Bank of England in giving more clarity on its forward guidance.

Forward guidance has been a limited success when practiced by other central banks. There have been "some serious communication challenges" for the Bank of England and the U.S. Federal Reserve after they introduced more detailed guidance on their forward thinking, as Jens Larsen, chief European economist at RBC Capital Markets, pointed out.

With a vast array of economic data to choose from, most of it pointing towards slow economic growth, the ECB may find it easiest to just sit tight.

(Read more: Euro could be next battleground for currency wars)

"The bar for the Governing Council to move from verbal steering to actual decisions is very high," Deutsche Bank analysts argued.

Yet the pressure to cut rates again is rising, according to analysts at Morgan Stanley, who argued that a rate cut is needed to "contain the upward pressure on money market rates" which has followed the LTRO program.

If there is any kind of movement, the market will leap on it.

"Any policy move would be a complete surprise and could trigger a pronounced market reaction," Frank Øland Hansen, senior economist at Danske Bank, pointed out.

"There is a risk that investors will be disappointed if Draghi's wording fails to be really dovish and then rates could go higher, yield curves flatten and EUR/USD could strengthen."

- By CNBC's Catherine Boyle. Twitter: @cboylecnbc.