The European Central Bank is today set to unveil its second economic stimulus cocktail in three months, spurred by fears that low energy costs are feeding into wages and prices, potentially perpetuating ultra-low inflation.

The euro zone’s central bank is widely expected to cut its deposit rate deeper into negative territory, adjust its €1.5 trillion asset-buying scheme and may even consider measures to prop up banking margins, hoping to boost prices after inflation dipped back into negative territory last month.

The ECB has little to show for the €700 billion it has spent buying government bonds and other assets in the past year, as tumbling raw materials prices blunt the impact of its quantitative easing.

That raises the risk that people will lose faith in the bank’s commitment to its mandate. Inflation has been below the ECB’s nearly 2 per cent target for three years and is likely to remain so for many more.

"The stakes are high at today's ECB policy meeting, given the disappointment in December and the fundamental questions now being asked about the efficacy and limits of monetary policy," JPMorgan economist Greg Fuzesi said.

“Crucially, it is no longer just a small minority of ECB governors who regard the remaining policy tools as problematic. Markets have also raised some concerns,” Fuzesi added.

Draghi has already said that acting too soon is better than acting too late, and that the rate meeting needs to recognise that the outlook for growth and inflation have deteriorated.

But with policy already deep in unconventional territory, the ECB has few big guns left and most remaining options risk either negative side effects or potential legal challenges, suggesting the Governing Council will opt for a package of modest measures.

Reuters