Last week’s December meeting of the ECB governing council concluded in line with expectations, with no changes to interest rates from their present levels of 0% for the refinance rate and –0.4% for the deposit rate.
Meanwhile, as previously announced, the ECB is ceasing net asset purchases under its quantitative easing (QE) programme this month.
The ECB post-meeting statement acknowledged the recent softer tone to eurozone macro data, noting that incoming figures have been weaker than expected. The eurozone economy grew by just 0.2% in Q3.
This is partly down to delays in car production associated with new EU emission standards. Data suggest that economic activity has failed to regain momentum in the fourth quarter.
The more challenging economic backdrop is reflected in the ECB’s updated forecasts. It marginally downgraded its GDP growth forecasts for 2018 and 2019 to 1.9% and 1.7%, respectively.
Meanwhile, the 2020 GDP forecast was left unchanged at 1.7%, whilst the ECB sees growth slowing to 1.5% in 2021. It also commented that the balance of risks to the growth outlook is “moving to the downside”.
The update of its inflation forecasts highlight why the ECB is taking such a cautious approach to tightening monetary policy.
Given this very subdued inflationary outlook, the ECB continues to emphasise that interest rates are expected to remain at their current very low levels “at least through the summer of 2019”.
In terms of market expectations, eurozone rates are not expected to turn positive until two years’ time.
The ECB introduced its negative interest rate policy in 2014 when the economy was on the cusp of deflation and still struggling to recover from the great recession of 2008-2010.
It was seen as a temporary measure. Since then, the economy has registered solid growth. Negative interest rates, though, remain in place.
Markets had expected that with QE finishing at the end of 2018, the ECB would move away from its negative interest rate policy in early 2019.
However, they have had to change their mind on the back of the guidance from the ECB. It is little wonder, then, that the euro remains at low levels against the dollar.