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The ECB, which has already pumped more than 1 trillion euros($1.3 trillion) of emergency cash into the banking system, may bereluctant to add to stimulus as it presses governments to takeresponsibility for the crisis. Photographer: HanneloreFoerster/Bloomberg Mario Draghi may have spoken too soon. Since the European Central Bank President predicted an economicrecovery at the start of the year, data have increasingly pointedto a deepening recession. While all 58 economists surveyedbyBloomberg say the ECB will leave itsbenchmark interest rateat arecord low of 1 percent today, Draghi last week toned down hisinflation-fighting rhetoric and sounded more cautious on theeconomic outlook, fueling speculation that he could ease monetarypolicy further. Things haven t gone Draghi s way, said KristianToedtmann, senior economist at DekaBank in Frankfurt. In contrastto a month ago, the ECB s bias will now be more toward an easingthan toward an exit strategy. Austerity measures aimed at taming the region s sovereign debtcrisis have pushed the Netherlands and Spain back into recessionand prompted French voters to revolt against PresidentNicolasSarkozywith an election looming on May 6. The ECB, which hasalready pumped more than 1 trillion euros ($1.3 trillion) ofemergency cash into the banking system, may be reluctant to add tostimulus as it presses governments to take responsibility for thecrisis. Policy makers meeting in Barcelona today will announce theirrate decision at 1:45 p.m. and Draghi holds a press conference 45minutes later. Officials hold two policy meetings a year away fromtheir Frankfurt headquarters. Tentative Recovery In the first three months of this year, Draghi said survey datashowed a tentative stabilization of economic activity at lowlevels and, while noting the outlook was subject to downside risks,predicted a gradual recovery. With the ECB s three-year loans to banks helping to calmfinancial markets, Draghi also told Germany s Bild Zeitung inMarch that the worst is over. Survey indicators are now telling a different story. After rising mildly in January and February, a gauge ofeuro-area manufacturingplunged in April to the lowest in almostthree years, according to London-based Markit Economics. The index,based on a poll of purchasing managers, shows that manufacturingactivity has contracted for nine straight months. A report yesterday showed euro-area unemployment rose toa15-year high of 10.9 percent in March, and an economic confidenceindicator published by the European Commission fell last month tothe lowest level since December. What Will It Take? What will it take for the ECB to cut interest rates? saidMarchel Alexandrovich, senior European economist at JefferiesInternational Ltd. in London. If it doesn t act today, it will beimportant to see whether Draghi prepares the markets for a Junemove, he said. The ECB is due to issue new projections next month. In March,it revised down its 2012 economic outlook to a contraction of 0.1percent from an expansion of 0.3 percent. The central bank alsoraised its 2012 inflation forecast to 2.4 percent from 2 percentand started to warn of upside risks to price stability,indicating policy makers didn t intend to ease policy further. Draghi changed his stance last week. Delivering a policy statement to lawmakers in Brussels on April25, he dropped any mention of upside inflation risks, omittedreference to an economic recovery and called on politicians toagree on a growth compact. Since then, Eonia forward contracts have retreated, signalinginvestors are increasing bets on rate cuts. Key Question The ECB has to accept that the recession will be longer anddeeper than forecast only two months ago, said Jens Sondergaard,senior European economist at Nomura International Plc in London. The key question is: Has the economic outlook deterioratedsufficiently to take rates to a record low or do they want to seemore data? Adding to the dilemma are growing divergences between euro-area economies and concerns within the ECB s 23-member GoverningCouncil that more stimulus would take pressure off governments tomake necessary fiscal reforms. Monetary policyis not a panacea and central bank firepower isnot unlimited, especially not in a monetary union, BundesbankPresident Jens Weidmann said on April 23. We can only win backconfidence if we bring down excessive deficits and boostcompetitiveness. And it is precisely because these things areunpopular that makes it so tempting for politicians to rely insteadon monetary accommodation. Diverging Economies In Germany, Europe s largest economy, business confidence isat a nine-month high, unemployment is at a two-decade low of6.8percent, and workers are winning some of the biggest wage increasessince reunification in 1990. By contrast, unemployment in Spain isat 24.4 percent and the economy has entered its second recessionsince 2009. Investor concern over Spain s ability to reduce its budgetshortfall has increased since Prime Minister Mariano Rajoyannouncedin March that the country will miss a 2012 deficit goal set by theEuropean Union. That pushed Spanish 10-year yields above 6 percentlast month and propelled the cost of insuring the country s bondsagainst default to a record. Given that we expect the peripheral situation to continuedeteriorating in a significant way over the coming months, weexpect the ECB to come under increasing pressure as to how it willrespond to renewed stress in the system, said Nick Matthews,senior European economist at Royal Bank of Scotland Plc in London,who forecasts cuts in the benchmark rate in June and September. Uncharted Territory The ECB has shelved its government-bond purchase program andhinted it doesn t want to offer banks another round of three-yearloans. A cut in the benchmark rate would take it into unchartedterritory below 1 percent, and raise the issue of whether to takethe 0.25 percent deposit rate to zero. Even though the latest indicators were negative, we havenot changed our baseline scenario as of this moment, ECB VicePresident Vitor Constanciotold reporters in Frankfurton April 26. We have to wait to see what happens in the next few months toconclude if our baseline scenario is really in danger or not. Michael Schubert, an economist at Commerzbank AG in Frankfurt,said policy makers aren t about to announce additional stimulusmeasures, at least not in the short term. While the ECB will continue to keep its options open, itstill believes it is up to the governments to take action, hesaid. To contact the reporters on this story: Jeff Black in Frankfurtat jblack25@bloomberg.netJana Randow in Frankfurt atjrandow@bloomberg.net To contact the editor responsible for this story: CraigStirling at cstirling1@bloomberg.net. 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