The ECB seemed set to leave its first significant interest rate hikes deep into next year as Mario Draghi gave little away at a key meeting about plans to further cut the extraordinary amount of money the central bank is pumping into the financial system.
“We maintain our forecast that interest rates will be on hold until September 2019, which is still somewhat later than markets expect,” said Jennifer McKeown, chief European economist at Capital Economics.
With the eurozone economy expanding for 20 straight quarters and millions of new jobs created, the main debate among policymakers is about how quickly to withdraw stimulus and preserve ECB firepower for the next downturn.
In particular, they need to agree on an end-date for the ECB’s €2.55 trillion bond purchase programme, which has cut borrowing costs and revived growth, even if it has failed to lift inflation back to the target.
Most economists believe that the ECB will only start to raise rates at the tail end of 2019 and even after then the next rate increases will likely be drawn out over a number of years.
“The recent data create uncertainty and that, together with weak inflationary pressures, points to a very slow exit,” said Nick Kounis, an economist at ABN Amro Bank in Amsterdam. “For the ECB, which was already having doubts even against the background of a strong economy, this is a reason to go slow,” he said. The strongest global expansion since 2011 is set to continue for another two years, but the IMF has warned that risks are mounting.
A potential protectionist spiral, unstable geopolitics and the impact of the US fiscal stimulus will weigh on an upswing that may be running out of steam. Following the lead of the US Federal Reserve, most central banks in developed economies are seeking to rein in the stimulus they deployed to counter the global crisis.
Yet for some, the slowdown may complicate a tightening process that is still in its early stages.
Mr Draghi yesterday said policy makers refrained from discussing the end of asset purchases or even the stronger euro as they focused on gauging the health of the region’s economy. Momentum has waned since the start of the year.
“The main takeaway is that nothing has changed in the ECB’s policy stance and they remain on course to taper later in the year,” said Marchel Alexandrovich, European financial economist at Jefferies.
That means central banks from Frankfurt to Ottawa appear to be taking a lower gear on the road away from easy monetary policy amid signs some key economies are slowing.
On the eve of a Bank of Japan decision expected to endorse continued easing, the ECB even avoided any discussion of its next steps toward ending bond buying and Sweden’s Riksbank pushed back a plan to raise interest rates for the first time in seven years.
Just days earlier, the Bank of Canada governor said more work is needed to heal the scars of the crisis.
Mr Draghi argued that the 19-country currency bloc’s economy remained strong but acknowledged evidence of a “pull-back” from exceptional growth readings seen around the turn of the year.
“Overall, however, growth is expected to remain solid and broad-based,” he told a news conference after ECB policymakers held their meeting.
- Reuters, Irish Examiner, and Bloomberg staff