A return of quantitative easing (QE) in the eurozone remains a near-term probability, commentators have said, as the European Central Bank (ECB) pledged to keep interest rates at 0% for the next 12 months.
The ECB's governing council said on Thursday it expects interest rates to "remain at their present levels at least through the first half of 2020", and "for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to 2% over the medium term".
That means the interest rate on the main refinancing operations will stay at 0.00%, with the interest rates on the marginal lending facility and the deposit facility remaining at 0.25% and -0.40% respectively.
The third incarnation of its targeted longer-term refinancing operations (TLTRO-III) initiative, meanwhile, will be set in a range between 0.1% and -0.3%. The TLTRO-III encourage banks to lend into the real economy by offering long-term funding at low levels.
Inflation fell significantly in May to 1.2%, from 1.7%. This raises concerns the bank's monetary policy has "failed to deliver the much-needed stimulus the Eurozone needed", according to Alessandro Capuano, global head of brokerage and business development at Fineco Bank.
While Mario Draghi, president of the ECB, has so far resisted the urge to take radical action, Nancy Curtin, chief investment officer at Close Brothers Asset Management, said he will be forced to intervene if the economy continues to stagnate.
Curtin added: "With rates already at 0% and no fiscal levers to pull, options are somewhat limited. Turning the QE taps back on by the end of the year is an increasingly probable scenario."
Andrew Kenningham, chief Europe economist at research firm Capital Economics, agrees the institution will likely have to resort to more QE, but thinks we won't see that until next year.
Capuano suggested the ECB may, in fact, be forced into raising rates once more.
"With rising weakness across the EU mainly driven by declining industrial activity in Italy and Germany as well as global growth worries mainly on the back of trade disputes the ECB will have no other option than to put their monetary policy on a halt and start rising rates again to battle inflationary pressures," he claimed.
The euro rose as much as 0.74% against the US dollar and 0.32% against the pound by 1pm UK time before retracing slightly.