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Eurozone economic torpor overshadows ECB policy meeting

Eurozone economic torpor overshadows ECB policy meeting
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There was more gloomy news for the European Central Bank’s policymakers, with word that eurozone businesses grew at the slowest pace this year in August and retail sales plummeted in July.

The Ukraine crisis overshadowed the subdued spending and investment.

The ECB is still hoping that by giving the region’s high street banks fresh access to cheap long-term loans it will boost lending to companies and individuals, thereby heading off deflation and another recession.

There is much speculation in financial circles about what the Bank’s policymakers will do at their latest monthly monetary policy meeting on Thursday. With no more room to cut interest rates, the feeling is that ECB officials will have to discuss soon launching more stimulus through quantitative easing.

That is injecting cash into the eurozone economy by printing money to buy bonds something the central banks of Britain, Japan and the United States have already felt the need to do.

The latest signs of slower growth, coupled with firms cutting prices at an even faster rate but still failing to drum up sales, add to pressure on the European Central Bank.

“The euro area is still just about expanding but the direction is downwards and the risk is we get more of the same as we move through the next few months as the geopolitical factors weigh heavily,” said Ken Wattret at BNP Paribas.

“It’s pretty obvious the ECB is worried, and rightly so. The pressure will continue.”

Optimism about the future among service firms, which dominate the bloc’s economy, fell to its lowest level this year amid rising tension over Ukraine that triggered sanctions from the West and countermeasures from Russia.

Retail sales across the region fell 0.4 percent in July, the first drop this year, though that was expected.

In France, the bloc’s second-biggest economy, business activity declined for a fourth month while business activity in Italy’s service sector unexpectedly shrank for the first time in five months.

By contrast, in Britain, the services industry expanded at the fastest pace in nearly a year last month, suggesting some companies were struggling to keep up with demand, a factor the Bank of England is likely to note as its ponders when to raise interest rates.

While no change is expected at its Monetary Policy Committee meeting on Thursday, the BOE is widely touted to be the first major central bank to raise interest rates – although not until early next year.

with Reuters