Draghi is pressing ahead with rate hike in 2019 despite risks: survey

[LONDON] Mario Draghi will only just manage to raise interest rates before his terms ends in October 2019, amid continued risks from US tariffs and Italian politics, according to a Bloomberg survey of economists.

With asset purchases about to conclude in December, most respondents predict the European Central Bank president will increase the deposit rate by September next year, to minus 0.2 per cent from minus 0.4 per cent.

That's earlier than market pricing for a hike of similar magnitude in the first quarter of 2020, though the economists acknowledge the challenges ahead. They see the biggest risks as trade protectionism and the possibility that Italy's populist government, planning a high-spending budget that could increase the nation's debt load, will precipitate a financial crisis.

"There remain a lot of bridges - both economic and geopolitical - to be crossed before the ECB can feel totally happy about raising interest rates," said Alan McQuaid, chief economist at Merrion Capital Group. There is "every chance" Mr Draghi will end his term without having overseen a rate increase.

No change in monetary policy or forward guidance is expected on Thursday, when Governing Council members will meet for the first time since their summer break. Instead, officials are set to confirm their plan to start slowing bond purchases in October, to cap the programme by the end of the year, and to keep rates on hold at least through the summer of 2019.

The ECB's staff will be updating their forecasts against a backdrop of moderating growth momentum and still-subdued inflation pressures. A spate of data this week showed global trade tensions were beginning to filter through into manufacturing performance, with German orders falling for a sixth month this year.

Further pain could be in store, with US President Donald Trump signaling in a Bloomberg interview last week that the truce on tariffs he struck with the European Union might not last.

"The greatest risk remains linked to the commercial tensions triggered by America," said Attilio Bertini, head of research at Credito Valtellinese, adding that he assigns a probability of no more than 30 per cent to the conflict escalating into a full-fledged global trade war.

Meanwhile, prospects that Italy's budget plans may violate an EU deficit limit of 3 per cent of economic output have kept investors on edge. The nation's bond yields have spiraled to the highest levels since the euro-area debt crisis, before a draft due later this month.

Any changes to the ECB's reinvestment policy will remain on the shelf, with some 17 per cent of respondents expecting an adjustment by December and two fifths none at all. A majority predicts the ECB will continue to roll over maturing debt for two to three years after fresh purchases come to an end.

If all goes according to plan, economists predict Draghi will provide more clarity about the exit path by April, including specifics on the timing of interest-rate hikes. According to the survey, the ECB will raise the main refinancing rate to 0.25 per cent from zero per cent in December next year.

BLOOMBERG