Rock-bottom ECB rates ‘here to stay’ on low inflation

The ECB may only hike rock-bottom interest rates as late as mid-2019, Irish economists have predicted. Eurozone inflation figures published yesterday showed inflation across the bloc remains low.

The central bank has a target below which to keep inflation, but close to an annual 2% over the medium term.

But, last month, Mr Draghi pulled in the amount spent on supports, when the ECB disappointed markets, by failing to increase the fire power of the monthly bond-buying programmes.

The fire-fighting has so far met with mixed success, inflation figures published yesterday showed.

Eurostat said consumer prices in the 19 countries that share the euro rose 0.2% year-on-year last month, against market expectations of a 0.3% rise.

That may add pressure on the ECB to further loosen its monetary policy, after it deployed a bare-minimum of extra easing last month.

Philip O’Sullivan, chief economist at Investec Ireland, said the ECB’s main interest rates, which are effectively close to zero, will only start to rise in the second quarter of 2019.

Have we seen the low in European negative rates? https://t.co/zYvtVl1SQf via @bsurveillance #ECB pic.twitter.com/xVlh8XUhOd

— Zoe Schneeweiss (@ZSchneeweiss) December 29, 2015

The ECB’s timing will have “a lot to do” with the outlook of crude oil, but the ECB would likely only start hiking rates in 2018 “at the earliest”, said Alan McQuaid, chief economist at Merrion Capital.

“My personal view is that the ECB won’t countenance a rate rise for at least two years,” said David McNamara, at Davy Stockbrokers.

Meanwhile, the ECB will likely need to be much “bolder” and pump up its bond-market purchases, as the central bank falls far short of its inflation target, said Jennifer McKeown, senior European economist at Capital Economics, in London.

Last year, ECB president, Mario Draghi, won support for the ECB to start pumping billions of euro into secondary markets, in monthly buying sprees, by purchasing government bonds of eurozone members — including those of Ireland — and other debt instruments.

“But with GDP expanding only slowly, economic spare capacity will continue to exert downward pressure on core inflation.

"Note, too, that the still-high rate of unemployment has kept wage growth very subdued,” Ms McKeown said.