The European Central Bank is all but certain Thursday to cut interest rates to try to boost ultra-low inflation and strengthen the wobbly recovery in the 18 countries that use the euro.

The ECB has been under pressure to act, especially after a report this week showed that inflation in the eurozone dropped more than expected last month to 0.5 percent – further evidence of a slack economy.  Excessively low inflation, if it persists, could become a serious economic threat. It could cause businesses and individuals to delay spending indefinitely as they await ever-lower prices. It could also make it harder for companies and countries to pare their heavy debt loads left over from the eurozone’s financial crisis.
The ECB maintains a target inflation rate for the eurozone of just below 2 percent. Fears have arisen that the continent’s excessively low inflation could slip into deflation – an outright fall in prices. Deflation can stall an economy, as it did in Japan for much of the past two decades.

Waning energy prices and a strong euro, which has reduced prices of imports, have been blamed for much of the fall in inflation. In countries such as Greece, whose government has held back government spending and state salaries in return for bailout loans from other countries, falling prices have been a consequence of official policies.

Perhaps the biggest help from rate cuts would be holding down the euro’s exchange rate against the dollar. Lower rates reduce investor returns, and thus can reduce demand for investments in a particular currency. Draghi’s statement May 8 that the bank was “not resigned” to the current low inflation and was “comfortable” taking action in June made markets think a rate cut was a sure thing – and sent the euro down from 2 { year highs around $1.40 to around $1.36.
In fact, markets have gone so far they may have set themselves up for disappointment.

Many economists have said pumping large amounts of newly created money into the financial system through large-scale bond purchases is the best way to reflate the economy. After all, that is what the U.S. Federal Reserve and the Bank of England did.
However, it’s considered the least likely. The measure faces legal, political and practical obstacles in an 18-country currency union. For one, buying government bonds raises the question of whose bonds to buy. A massive bond market intervention could lower borrowing costs – but most companies in Europe get credit from banks, not bond sales.