The ECB May Change Up Monetary Policy Tomorrow - Here's What You Need To Know

The camp predicting that the European Central Bank will soon cut rates is growing.

Economists at Citi, Morgan Stanley, BNP Paribas, Crédit Agricole, Credit Suisse, and a few other shops think the ECB will pull the trigger on Thursday, announcing a cut to its benchmark refinancing rate - which currently stands at 0.25% - by either 10 or 15 basis points.

However, the majority still believe the Bank's Governing Council will elect to leave rates unchanged tomorrow.

"Expectations of a rate cut are off the mark, despite continued low inflation readings," says Lorcan Roche Kelly, an analyst at Agenda Research.

"ECB President Mario Draghi continues to insist that inflation expectations are firmly anchored over the medium term. He would only move on interest rates if he thought disinflation or deflation was becoming self-sustaining."

Much of the debate centers on the outlook for inflation. Last week, data from Eurostat revealed that the euro area-wide harmonized index of consumer prices (HICP) rose 0.8% from a year earlier in January, above the initial 0.7% estimate released a month ago. Eurostat's initial estimate for February HICP, released a few days later, matched January's 0.8% reading.

Thursday, the ECB will publish updated staff macroeconomic forecasts for inflation and other variables.

"We forecast a small (10bp) cut in the ECB's main refinancing rate next week, but the surprising uptick in euro zone core inflation in February does increase the risk of a delayed policy response," says Frederik Ducrozet, a senior euro zone economist at Crédit Agricole.

"There remains a tactical case for pre-emptive easing, in our view, as the ECB staff forecasts should reflect downside risks to the medium-term outlook for price stability and March HICP will likely reach new record lows, especially if the euro remains 'too strong' for too long."

Elwin de Groot, a senior market economist at Rabobank, disagrees.

"Recent comments by ECB Governing Council members, including Peter Praet, Benoit Coeure, Ewald Nowotny and Draghi himself, suggest that they genuinely believe that deflation is not around the corner (perhaps one couldn't expect otherwise)," says de Groot.

One thing many ECB watchers expect on Thursday, however, is an announcement that the ECB will no longer sterilize purchases of government bonds it makes under its Securities Markets Programme (SMP) in order to boost liquidity in the banking system, given recent press reports that the Bundesbank has dropped its opposition to such a move.

"A complete end to SMP sterilization could see the Eonia fixing fall around 6-7 basis points, with longer-dated rates rallying a bit less," say Robin Brooks and Mariano Cena, strategists at Goldman Sachs.

"We think the instantaneous impact on [the euro-U.S. dollar exchange rate] would be quite small, around half a big figure."

The ECB will release its decision on interest rates Thursday at 7:45 AM ET. Mario Draghi's monthly press conference ensues at 8:30 AM.