ECB president Mario Draghi disappointed expectations the bank would act decisively to counter growing global economic clouds — but financial markets signal that it could yet be forced to cut rates later this year.
Speaking to reporters after the ECB meeting in the Lithuanian capital of Vilnius, Mr Draghi said the “prolonged” uncertainty caused by trade wars, the rise of populism, and Brexit meant the eurozone economy would grow slower next year and in 2021 than the bank had earlier projected.
That meant that the ECB will keep interest rates unchanged to next summer, he said.
The remarks disappointed market participants who hoped the ECB would join other central banks to more strongly signal its readiness to cut interest rates to counter a slowdown in the global economy.
Nonetheless, Mr Draghi said the governing council had talked in detail about rate cuts and other measures, but only as a contingency should “global headwinds” weigh more heavily on the eurozone.
The risks to its forecasts were “tilted to the downside” and the ECB was “ready to act”, Mr Draghi insisted.
He added, however, in a general assessment, that the outlook for the eurozone was “not bad”, with no risk of deflation and only a small risk of a recession.
Nevertheless, some financial markets continue to signal an even-money chance the ECB will be forced to cut rates later this year.
Any rate cut would likely benefit the many Irish mortgage borrowers who bought a tracker home loan before banks stopped selling them almost 12 years ago, but variable-rate borrowers and SMEs here, who pay the highest rates in the eurozone, are likely to see little benefit even if the ECB cuts its rates.
When asked at the press conference about market expectations for a rate cut, Mr Draghi said markets “might see a much broader phenomenon, where the multilateral order that we have lived in since World War II” is disappearing, he said.
Ronan Costello, head of euro money markets at Bank of Ireland, noted “the downbeat” nature of Mr Draghi’s remarks and the ECB’s offering of a new programme of cheap loans to help keep eurozone banks lending to customers.
“Despite the overall pessimism and numerous references to ‘prolonged uncertainty’ and the potential economic damage of protectionism, Mario Draghi refused to give any indication that the ECB have moved closer to cutting rates further or re-opening their asset purchase programme,” Mr Costello said.
“While the options were discussed at today’s meeting, they didn’t garner enough support and have been held back as a contingency.”
Bloomberg economists David Powell and Maeva Cousin said the ECB was more focused on the global outlook than the strong performance of the eurozone economy in the first quarter.
“Rising external risks have caused the governing council to clearly signal its dovish bias. A rate hike in 2020 is looking increasingly unlikely,” they said.
Meanwhile, Finance Minister Paschal Donohoe said any escalation in the global trade wars could increase the risks facing the Irish economy.
He told CNBC that the Government would aim to build the “resilience” of the Irish economy, including further improving its finances and helping to diversify the country’s exports.