Eurozone Monetary Policy October 2018


Eurozone: ECB stays the course in October

October 25, 2018

At its 25 October monetary policy meeting, the European Central Bank (ECB) decided to leave its main interest rates unchanged, reaffirming its commitment to end its quantitative easing (QE) program by the end of the year—provided that incoming data plays out as expected. Accordingly, the Bank left the refinancing rate at 0.00%, the marginal lending rate at 0.25% and deposit facility rate at minus 0.40%.

The decision comes despite recent financial market volatility, lackluster economic data and mounting risks to the Eurozone’s outlook. The Italian government’s spend-heavy budget has caused Italy to butt heads with European officials, which has sparked volatility in bond markets and generated wider political uncertainty. Moreover, an escalation in global protectionism is also casting a shadow over the Eurozone’s growth prospects, while incoming data has confirmed that growth—although still solid—has slowed. Despite the increasingly foreboding backdrop, in the accompanying press conference ECB President Mario Draghi stated that risks to the outlook remain “broadly balanced” and that overall economic data remains consistent with the ECB’s expectations. In addition, inflation continues to hover around the ECB’s target, justifying the continuation of monetary policy at the meeting.

Looking ahead, the ECB is expected to keep monetary policy conditions accommodative, proceeding with a gradual normalization of monetary policy. Although the end of QE will be viewed as de facto monetary tightening, Draghi reiterated the ECB’s intentions to reinvest the principal payments from maturing securities “for an extended period of time”. Moreover, low interest rates will keep conditions accommodative for the foreseeable future and Draghi emphasized once again that interest rates are expected to remain at their present levels “at least through the summer of 2019” and that accommodative monetary policy is still necessary to keep inflation at the ECB’s target of “below, but close to, 2.0%” in the medium-term.

All our analysts expect that the refinancing rate will remain unchanged for the rest of this year at 0.00%. Our panelists see the policy rate ending the year at 0.15% in 2019 and 0.58% in 2020.


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