* Drop in inflation changes ECB's risk-reward calculus
* Soft U.S. payroll growth to keep Fed on hold for now
* Chinese Communist Party meeting to set economic path
By Alan Wheatley
LONDON, Nov 3 Even as the euro zone economy
shows faint signs of stirring, the European Central Bank is
likely to send a dovish message this week that more monetary
help will be on the way before long.
After a plunge in inflation to 0.7 percent in the year to
October, well below the ECB's target of just under 2 percent,
UBS and RBS are among those who reckon a rate cut could come as
soon as Thursday's policy-setting meeting.
At the very least economists expect ECB President Mario
Draghi to indicate that the balance of risk has tilted toward
further easing, partly because the recent strength of the euro
will hurt exports with a lag.
But many believe it would make more sense for the ECB to
hold fire until December, when the bank's staff updates its
growth and inflation forecasts.
"A significant downward revision to its inflation number for
next year - let's say at or below 1 percent, from 1.3 percent
currently - may push the ECB to act," said Giuseppe Maraffino, a
bond analyst at Barclays.
ALL OPTIONS OPEN
A cut in the ECB's main refinancing rate, now at 0.50
percent, would have the greatest headline impact.
Other options include a reduction in the deposit rate to
below zero, which would have a bigger effect on money market
rates, or a promise of another long-term refinancing operation
to ensure banks have plentiful liquidity.
Sarah Hewin, an economist with Standard Chartered Bank in
London, agreed that disinflation made the case for a rate cut
more compelling. But she said there were signs the euro zone's
economy was turning up.
The ECB's latest bank lending survey provided evidence that
credit constraints might soon ease, while struggling members of
the euro zone periphery appear to be touching bottom. Spain
returned to modest growth in the third quarter.
"We haven't changed out forecast, which is for no rate cut,
taking into consideration way the ECB has approached policy
previously," Hewin said.
Although the strong euro might be weighing on prices, the
drop in inflation fundamentally reflects immense slack in the
euro zone. Unemployment in September was a record 12.2 percent.
Other central banks are also grappling with sub-par growth,
reduced pressure on commodity prices because of slower Chinese
demand and improved energy buffers, notably in the United
States, said Alan Ruskin, chief currency strategist at Deutsche
Bank in New York.
"Though a few central banks will write off disinflation as a
lagged response to output gaps, generally G10 monetary policy
will remain easier for longer on a global scale," he said.
ALL EYES ON CHINA'S PLENUM
Economists unanimously expect the Bank of England this week
to keep its short-term policy rate at 0.5 percent and its asset
purchases at 375 billion pounds, even though the British economy
has logged two consecutive quarters of robust growth and house
prices are surging in and around London.
And many believe the Federal Reserve, which held policy
unchanged last week, is unlikely to start reducing its bond
purchases from $85 billion a month until 2014, not least because
economic statistics have been muddied by last month's partial
government shutdown in a row over the federal budget.
Friday's U.S. employment report for October is likely to
show that nonfarm payroll growth slowed to 125,000 from an
already unimpressive average over the previous three months of
just under 150,000.
Economists polled by Reuters are also forecasting the
unemployment rate to tick up to 7.3 percent from 7.2 percent.
Julia Coronado with BNP Paribas in New York expects
employers to have added only 100,000 jobs, partly because the
government closure slowed private sector hiring momentum.
"Coming as it will with the slowing in the interest
rate-sensitive sectors of housing, business investment, and auto
sales, such a reading would effectively eliminate the
possibility of a December taper," she said.
With the Fed waiting to examine 'clean' data, the
preliminary report of third-quarter GDP will be less important
than usual. Economists expect a growth rate of 1.9 percent, down
from 2.5 percent in the April-June quarter.
Far more important in the longer run for the global economy
will be a gathering of the Chinese Communist Party's Central
Committee to plot economic strategy for the next few years.
Whereas Western central banks have embraced forward guidance
with gusto, the CCP remains frustratingly opaque: expectations
that the Nov. 9-12 meeting will provide a blueprint for policy
reform are likely to be disappointed.
The key gauge of success should be whether the leadership
presents a coherent plan to shift the economy from investment to
consumption that can provide clear direction to officials over
the years ahead, according to Nicholas Consonery and Michal
Meidan with Eurasia Group, a consultancy.
"By contrast, a piecemeal approach would signal that the
leadership has been unable to agree on a framework for how
reform should progress," they said in a report.