Interest rate hike may be pushed back to 2020
The euro went lower as ECB head Mario Draghi shaved the growth outlook for the eurozone economy, which may signal that the first interest rate hike since the crisis may be delayed, market watchers said.
In its final meeting of the Governing Council this year, Mr Draghi confirmed the ending of the central bank’s huge bond-buying programme that helped stop Europe sliding into stagnation.
But in remarks that were seized on by interest-rate watchers, Mr Draghi also shaved the ECB’s growth outlook, saying that “the latest data and survey results have been weaker than expected”.
He cited weakening demand of the eurozone’s exports, as well as “some country and sector-specific factors”.
His caution may mean the first interest rate increase since before the eurozone slid into its debt crisis may be pushed out to late 2019 or even into 2020.
Ronan Costello, head of euro money markets at Bank of Ireland, said that the remarks could be significant.
“Along with a downgrade to the growth and inflation forecasts, Mario Draghi delivered a mini-downgrade to the balance of risks, saying ‘the balance of risks is moving to the downside,’” said Mr Costello.
“This is an acknowledgment of a softer run of data and weaker market sentiment.
I’d read it as a heads up to the markets that the ECB will need to consider pushing out their rate hike guidance, possibly in March, if the first quarter economic data doesn’t show improvement. The market reacted by pushing euro rates and the currency lower
- he said.
The euro eased to $1.135 and 89.9 pence.
Jennifer McKeown, chief European economist at Capital Economics, said: “We are still pencilling in a first hike in September, but the chance of a delay has risen.”
“While the ECB has ended its net asset purchases, it plans to reinvest funds from maturing securities for a long time to come and has stressed that any future rate hikes will depend on a build-up of inflationary pressure,” she said.
Mr Draghi is widely credited with saving the euro and securing many countries’, including that of Ireland’s, continuing eurozone membership after pledging in 2012 that the ECB was “ready to do whatever it takes to preserve the euro”.
The ECB subsequently unleashed its huge bond buying, or quantitative easing, programme by purchasing sovereign and corporate debt, to help push up growth in the eurozone.
Mr Draghi has now ended that so-called asset purchase programme this month, though the ECB is “enhancing our forward guidance on reinvestment” which means that the effects of stimulus will not end overnight.
Amid the US-China trade war, rows over Italy’s budget, as well as the fallout of Brexit and the political pressures facing French President Emmanuel Macron, the economic outlook is far from rosy, however.
Mr Draghi said the ECB had eased back its growth projections for the eurozone to 1.9% this year and 1.7% in 2019. It sees growth of 1.7% in 2020, and 1.5% in 2021.
Meanwhile, IG’s Chris Beauchamp said that sterling rose slightly even as “Theresa May’s renewed attempt to get some concessions from Europe is not going well” after Taoiseach Leo Varadkar and President Macron rejected a major re-write of the UK withdrawal agreement.
