Eurozone: ECB sticks with plan, but warns of further slowdown
December 13, 2018
Amid an onslaught of downbeat economic data, the European Central Bank (ECB) downgraded its tone on the Eurozone economy at its 24 January meeting, but left its monetary policy and forward guidance unchanged. Interest rates remain at record-low levels with the refinancing rate at 0.00%, the marginal lending rate at 0.25% and deposit facility rate at minus 0.40%. Signs of a slowing Eurozone economy have put policymakers in the spotlight as doubts over the strength of the Eurozone recovery swirl, only weeks after ending its massive asset-buying program in December.
In the accompanying press conference, ECB President Mario Draghi struck a more downbeat tone than in the previous meeting, acknowledging that “risks surrounding the euro area growth outlook have moved to the downside”. GDP growth halved in the third quarter of 2018 and a slew of weak data for the final quarter of the year suggests that a strong turnaround failed to materialize. Draghi cited chiefly external reasons explaining the slowdown, such as rising global protectionism and vulnerabilities in emerging markets, along with some sector and country-specific factors. Concerning the domestic economy, Draghi was more upbeat stating that a tightening labor market and favorable financing conditions will keep the economy growing, despite the tough external environment. The ECB is scheduled to revisit its growth projections at its March meeting.
Aside from the less optimistic tone, the Bank’s forward guidance was virtually unchanged: Interest rates are expected to remain at their present record-low levels until at least the end of summer or longer, if needed, to ensure that inflation converges at the Bank’s target of “below, but close to, 2%”. In addition, the Bank emphasized that it would continue to reinvest the principal payments from maturing securities “for an extended period time”, which should keep conditions accommodative. Overall, the Bank will likely take a wait-and-see approach to see how external events play out before unveiling any potential changes to guidance or monetary policy.
Commenting on his view of the ECB’s next steps, Carsten Brzeski, chief economist at ING, stated:
“The ECB will try to buy as much time as possible in the coming months to see how the March folly (Brexit, US-China trade talks, German automotives) will evolve. We will probably have to wait until the June meeting before the dust has settled. Until then, the ECB will be on higher alert than before. However, it will require a very benign outcome on all these risk factors to see Draghi hiking rates before he leaves office.”