Investing.com – The European Central Bank (ECB) is expected to keep monetary policy on hold on Thursday, but president Mario Draghi could give signals of future moves, with experts contemplating that the euro area monetary authority could have enough data on the impact of the U.K.’s decision to leave the European Union (EU), known as a Brexit, on the region’s economy as early as September.
Impact of Brexit on euro zone economy
On Tuesday, the International Monetary Fund (IMF) cut the growth forecast for euro zone in 2017 to 1.4% from the prior 1.6% estimate due to its expectations for the impact on the region’s economy.
The consensus for euro zone gross domestic product (GDP) growth next year was slashed in the latest poll to 1.3% from 1.6% earlier.
Draghi too had warned that the Brexit could shave up to 0.5% off the region’s GDP over the next three years and, in a first sign of the post-Brexit reaction, a report released on Tuesday revealed that German economic sentiment deteriorated to a four-year low in July, as the Brexit shock hit business confidence.
However, the ECB was by and large expected to follow the Bank of England’s (BoE) move last week and stay in “wait and see” mode in order for incoming data to reflect the size of the impact before making a decision.
As the BoE explained in its own decision, “Official data on economic activity covering the period since the referendum are not yet available.”
Morgan Stanley noted in a recent report, “We think the ECB needs more time to better assess the impact of Brexit on the euro area outlook, before deciding on further policy action.”
Economists expect QE extension, doubt ECB effectiveness
Recent surveys of economists showed the unanimous belief that the ECB would leave rates unchanged in this round, though the majority felt that Draghi’s team would take more action by the end of the year.
Most experts were focused on the idea that the ECB would extend the quantitative easing (QE) program beyond March 2017.
Other options seemed less likely with only 40% of economists surveyed by Bloomberg suggesting the ECB could eventually cut the deposit rate, currently in negative territory at -0.4%, and less than 20% predicting an expansion in the QE purchases from its current €80 billion ($88.1 billion) a month.
Yet the €1.8 trillion ($2 trillion) in stimulus has so far done little to push inflation back towards the ECB’s target 2%. With June’s reading at just a meager 0.1%, analysts were questioning the effectiveness of the measures and whether the ECB truly had more ammunition at its disposal.
Almost a third of 31 respondents who answered an extra question in a recent Reuters survey said they were less convinced of the ECB's ability to influence economic performance and inflation now compared with the start of the year.
Draghi call to governments to fall on deaf ears… again
It was unclear whether more monetary easing will help, especially in the absence of fiscal stimulus, and Draghi was largely expected to repeat his insistence that governments needed to get on the ball.
"We fear that Draghi's calls for a loosening of the purse strings will go unheard, at least for now," BNP Paribas said in a report.
"As things stand, then, the burden of responding to the Brexit shock will remain with the ECB, which is all too aware that it has fewer and fewer tools with which to respond," these economists added.
Focus on Draghi and possible hints for September action
With nothing expected to change in the announcement at 11:45AM GMT, or 7:45AM ET, the focus will turn to Draghi’s press conference at 12:30GMT, or 8:30AM ET, to see if the ECB president follows in the footsteps of BoE governor Mark Carney and gives a strong hint for a future move.
While the BoE minutes revealed that “most members of the Committee expect monetary policy to be loosened in August,” the next policy decision for the ECB is scheduled for September 8.
“We would deem the ECB president strongly hinting at additional ECB policy action in September,” Morgan Stanley noted, suggesting that the wait would allow the monetary authority to have not only the updated set of staff economic projections on hand, but also the results of the bank stress tests as well.