ECB will hike rates at some stage, but it may no longer be in a rush

ECB will hike rates at some stage, but it may no longer be in a rush

Jim Power

Last year was great for the eurozone economy, with GDP expanding by 2.3%. That is above the zone’s potential growth rate.

And nowhere was the recovery felt more than in the labour market. The unemployment rate declined to 8.5%, with significant declines in every member country.

The employment rate amongst those aged 20 to 64 was 72.2% in the EU, the highest rate ever. For an economic area that has been blighted by moribund growth for the past couple of decades, 2017 felt somewhat of a turning point.

Of course, the impact of artificially low-interest rates and the loose monetary conditions flowing from quantitative easing (QE) probably gave a somewhat exaggerated hue to the economy.

But growth is still very much on the up and most forecasters spent the year revising growth forecasts upwards.

Alas, the picture has become less rosy in recent weeks, with some dampening of growth.

In the first quarter, GDP growth slowed from an annual rate of 2.8%, at the end of 2017, to 2.5%.

It is hard to say what is happening, but the modest easing of growth — and it is only a very modest easing of growth — is most likely due to persistent euro strength, bad weather, strikes, concerns about the global growth of protectionism, and less spare capacity, after such a relatively strong economic rebound.

I have argued that if the growth momentum evident in 2017 persisted for much longer, the ECB could become less relaxed. And once the bond-buying programme (QE) ends this autumn, higher interest rates could follow in 2019.

This view of the world is already starting to look somewhat alarmist and the obvious relaxation in the ECB is likely to last for the foreseeable future.

The ECB will obviously bring official interest rates back towards normality at some stage, but if the current, modest softening of economic activity persists over the coming months, the ECB will not be in any rush to change course on official interest rates.

In October, Mario Draghi will step down, after eight years at the helm of the ECB, and he will now almost certainly do so without ever having to increase interest rates.

This legacy would not displease him. What happens after he steps down will be more interesting. The favourite to succeed Draghi is Jens Weidmann, the German representative on the ECB Governing Council. One would expect Mr Weidmann, a Bundesbank member, to be less comfortable with current, artificial monetary policy conditions than his predecessor.

For Irish tracker mortgage holders, the succession race at the ECB will be watched keenly. They can sleep easily for the moment. The softening apparent in the eurozone economy is not being felt in Ireland.

The economy is rapidly approaching full employment and labour shortages will inevitably become a feature of the landscape over the coming year.

All in all, the Irish economy remains in good health, but we will need to watch external developments.

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