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Considering the upheaval that could have been caused by the Russian troop movements in and around Ukraine, the markets have shown a remarkably calm attitude over the course of the week. Now that things are no longer escalating, investors can now fully turn their attention to the ECB statement tomorrow.
The biggest question hanging over the European Union at the moment is the lack of inflation – it currently stands at 0.7%, which is well below the targeted 2%. Many had hoped that a consumer spending lead increase in retail sales would help drive the level higher, however German spending has been far from prolific and, even with today’s record 1.6% monthly growth in monthly retail sales, one swallow does not make a summer. With this showing no sign of changing, the ECB will need to look at stimulating change themselves. Lowering the interest rate has been an option historically; however any reduction from an already low 0.25% is unlikely to have an effect.
One policy they may look to introduce is a charge for cash that banks hold on deposit; this would effectively be an inverse interest rate. Strong caveats to ensure this would only be levied at banks and not the underlying clients would need to be in place, but the charge could be the catalyst for increased small- and medium-sized business lending.