ECB to keep rates low
The expectation is activity picked up, with the economy expanding by 0.5% in the quarter after it grew by a modest 0.3% in both the second and third quarters.
Survey data on the eurozone economy point to a pick-up in growth in the closing months of the year.
This view is also supported by ‘hard’ data. Eurozone industrial production rose by 1% in October/November versus the third quarter.
Retail sales grew by 0.9% in the same two months compared to quarter three, while consumer confidence hit a high in December.
The unemployment rate has continued to decline in recent months. Nonetheless, the eurozone economy continues to face challenges, including high levels of unemployment in many countries, a lack of structural reforms in some economies, weak levels of business investment and only modest wage growth.
There are also tailwinds helping the economy, including low inflation, the relatively weak euro and the impact of monetary policy easing.
Today’s data should show the eurozone economy grew by 1.7% in 2016 and the ECB is forecasting similar growth for this year and in 2018. With the eurozone on a solid growth path and unemployment declining, there have been calls for the ECB to soon begin tightening monetary policy.
It is being argued there is no need for the ECB to continue with its negative interest rate policy and its QE asset purchase programme.
Such calls seem premature as inflation remains very low in the eurozone. While growth improved in the closing months of the year, it still remains modest enough.
Indicators suggest the economy may have lost a bit of momentum at the start of this year. In 2011, the ECB stunned markets by hiking rates as activity picked up and rising oil prices pushed inflation higher. It had to reverse the rate hikes before the year was out when activity weakened again.
It is unlikely to make the same mistake this year. No sign the ECB is about to alter course anytime soon.
The view of the markets is that wholesale interest rates in the eurozone will remain negative until the second half of 2019.
