Eurozone Monetary Policy June 2019


Eurozone: ECB pushes back possible rate hike at June meeting

June 6, 2019

The European Central Bank (ECB) turned more dovish at its June monetary policy, responding to the bloc’s softer growth momentum. The ECB pushed back the timing of a rate hike and left interest rates at record-low levels: The refinancing rate sits at 0.00%; the marginal lending rate at 0.25%; and deposit facility rate at minus 0.40%. In addition, the ECB revealed some details on the new series of longer-term refinancing operations (TLTRO-III), a series of seven quarterly two-year loans to banks that will start in September.

Anxieties over the state of the Eurozone’s economy and modest inflation prompted the ECB to soften its tone in June. While GDP grew a healthy 0.4% quarter-on-quarter in Q1, higher frequency data has pointed to weak momentum in the second quarter and the tense geopolitical scene has drummed up fears of a slowdown for the export-oriented Eurozone economy. The ECB made modest revisions to its growth forecasts, revising growth up a notch for 2019 to 1.2% (previous: 1.1%), but trimming the outlook for 2020 and 2021 to 1.4% growth in both years (previous: 2020: 1.6%; 2021: 1.5%).

Looking ahead, the ECB pushed back the timing of a possible rate hike, stating that key interest rates will “remain at their present levels at least through the first half of 2020” as opposed to “through the end of 2019” as previously stated. The Bank added that risks to growth remain titled to the downside and are largely related to external factors, such as rising protectionism. Notably, some market analysts have started to predict a possible cut in rates, especially if the Fed shifts to a more dovish stance and the trade war escalates.

Summarizing ING’s view, Petr Krpata, chief EMEA FX and interest rates strategist, noted:

“In our view, the ECB is as close as it gets to an interest rate cut. If the Fed is in a situation whereby it needs to cut interest rates (largely due to the trade war effect) it is likely that the ECB will deliver interest rate cuts as well. Should the global trade wars intensify by the end of June (ie, the US imposing tariffs on all Chinese exports) our economists don’t rule out an ECB cut already in the July ECB meeting (a modest cut of 10bp) before a tiering system is introduced in September (as the ECB will need more time to come up with details of the system) and an even larger cut being delivered then should it be necessary. This all can happen before President Draghi leaves office (his last meeting is in October).”

All of our panelists project the refinancing rate to remain at 0.00% this year.

Author: Angela Bouzanis, Lead Economist

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