The European Central Bank (ECB) kept interest rates unchanged at its meeting on Thursday as president Mario Draghi warned that growth risks in the eurozone were moving towards the downside because of global trade tensions, Brexit and financial market volatility.
“The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility,” Draghi said at a press conference.
Draghi said in the face of rising “general uncertainty” the central bank planned to keep interest rates at their current levels – the benchmark rate remains at zero – through to the summer and possibly longer.
In December, the central bank formally brought an end to its €2.6bn quantitative easing programme, meaning that bond purchases have fallen from €15bn a month to zero.
Downside risks growing
“In theory, this year was to herald the start of the ECB policy normalisation process. That may still turn out to be the case, but near-term downside risks are growing,” said Michael Metcalfe, global head macro strategy at State Street Global Markets.
Eurozone growth fell to 0.2% in Q3 2018 and recent data points to slowing growth in Germany, the region’s largest economy.
“With weakening economic growth, particularly in Germany which has been the growth engine for Europe for years, it is unsurprising that the ECB has stayed on hold for now,” said Jake Robbins, fund manager, Premier Asset Management.
Metcalfe said the data suggested headline inflation was set to fall rapidly in the eurozone in Q1 and in response, the ECB’s first policy step may need to allay fears of a sharp contraction in its balance sheet in the next two years by offering another targeted longer-term refinancing operation to support liquidity in the banking system.
The ECB plans to reinvest cash from maturing bonds for an extended period of time beyond its next interest rate hike in a bid to keep borrowing costs down over the next couple of years.
Trade war tensions
Robbins added: “Continuing tensions over trade between the US and China are undoubtedly having a dampening effect on confidence and growth globally. Europe is more reliant than most regions on manufacturing and exports so is suffering this slowdown more conspicuously than the US for instance.
“Whilst the economic outlook remains cloudy, the ECB is unlikely to move higher anytime soon. This is particularly so given high debt levels and ongoing concerns over the strength of many European banks’ balance sheets, and the fact that almost all central banks around the world continue to maintain very low interest rates.
“With some excess liquidity being sucked out of financial markets due to quantitative tightening in the US contributing to recent market volatility, most other central banks look likely to continue to keep some easing in place as a counterbalance.”
