Donohoe set for October budget ‘Draghi bounty’ as ECB prepares to boldly act

The head of the ECB Mario Draghi came close to confirming that some interest rates are heading lower in September -- and a senior analyst says this will provide Finance Minister Paschal Donohoe with a ‘Draghi bounty’ and more ‘fiscal room’ in his autumn budget.

Donohoe set for October budget ‘Draghi bounty’ as ECB prepares to boldly act

The head of the ECB Mario Draghi came close to confirming that some interest rates are heading lower in September -- and a senior analyst says this will provide Finance Minister Paschal Donohoe with a ‘Draghi bounty’ and more ‘fiscal room’ in his autumn budget.

Mr Draghi who is preparing to retire from the central bank in a few months to be succeeded by the former IMF boss Christine Lagarde told reporters in Frankfurt, Germany, that monetary policy will need to stay loose for “a prolonged period” and the bank was ready to use all the tools at its disposal amid a rapid slowdown in manufacturing, particularly in Germany and Italy.

Financial markets and observers have for some time anticipated the ECB would react to the US-China trade war that has weighed on Europe’s manufacturing. If the ECB were to assess that the eurozone economy was deteriorating through the summer, it may sanction a wide range of rate cuts when it next meets in Frankfurt in September.

Widespread rate cuts and not just the ECB lowering its deposit rate would likely result in cuts in all types of Irish home-loan rates, including tracker mortgage rates. Many government interest rates in Europe continued to trade at below or close to zero.

The Irish 10-year bond traded at a yield of just above zero, at 0.11%, down five basis points in the day, while the equivalent 10-year German bund traded at minus 0.37%.

And the Swiss yield on its 50-year bond fell below zero, implying the government there can borrow from international debt markets for nothing over a period of 50 years.

Owen Callan, an analyst at Investec Ireland, said that Finance Minister Donohoe will also get “a Draghi bounty”, as the tumbling costs of servicing the national debt would deliver more fiscal room for his October’s budget.

Many economists believe the ECB in its next meeting in Frankfurt in September will cut its deposit rates and leave its main rate as far as ordinary borrowers are concerned unchanged.

Mr Callan said a cut in the deposit rate only in September was more likely which would mean that Irish mortgage borrowers would not automatically benefit.

However, the prospect of low rates over a prolonged period would also help push rates lower in time, he said.

Mr Draghi told reporters there was no risk of a eurozone recession, as jobs and wages rise but that areas of the economy were showing signs of slowing. After a volatile session, the euro ended little changed at $1.115 and at 89.21p.

Ronan Costello, head of euro money markets at Bank of Ireland said that the ECB hadn’t taken action at Thursday’s meeting but has “set the stage for a package of policy changes in September”.

“President Draghi assured markets of the ECB’s commitment to their 2% inflation target, saying, ‘we don’t like what we see on the inflation front’, while also giving a clear indication that the ECB stand ready to act.

The bank has tasked the Eurosystem committees with examining the options available to the governing council ahead of September’s meeting,” Mr Costello said.

Joshua Mahony, market analyst, at online broker IG, said Mr Draghi had failed to lift shares after the ECB meeting. “Despite a slew of worrying data-points and below-target inflation, the bank has instead opted to delay and analyse until a now-crucial September meeting,” Mr Mahony said.

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