You are here

ECB keeps policy unchanged but may acknowledge weak growth

doc73s03tvzce1399k3jq6_doc6zc64qm02asc79rq7ep.jpg
The European Central Bank left its policy stance unchanged as expected on Thursday, keeping a rate hike later this year on the table even as the euro zone economy suffers its biggest slowdown in half a decade.

[FRANKFURT] The European Central Bank left its policy stance unchanged as expected on Thursday, keeping a rate hike later this year on the table even as the euro zone economy suffers its biggest slowdown in half a decade.

Having ended a landmark 2.6 trillion euro (S$4.02 trillion) bond purchase scheme just weeks ago, the ECB said it still expected to keep interest rates at record lows 'through' the summer, sticking with its long-standing guidance even though markets now see a much later move.

Germany, France and Italy, the euro zone's biggest economies, barely grew in the fourth quarter of 2018 and survey data showed on Thursday business activity across the euro zone expanded at the slowest pace since 2013 at the start of this year.

Manufacturing contracted near the end of 2018, export growth slowed and PMI data out on Thursday once again disappointed.

sentifi.com

Market voices on:

A predicted rise in underlying inflation has also failed to materialise and employment growth is slowing, a worrying sign for wages and inflation.

All this suggests that the euro zone is now growing at or even below trend, so inflationary pressures may take longer to build - testing the credibility of the ECB, which has undershot its price growth target since early 2013.

Some of the weakness may be temporary, like the struggles of the German auto industry to adjust to new emissions standards, investor caution ahead of Brexit or the drag on sentiment from protests against French President Emmanuel Macron.

But sluggish external demand is likely to be more persistent, with China's economic struggles likely to exacerbate the slowdown.

If such a drag on growth persists, the ECB will be pressed to signal record low rates for even longer, providing more stimulus by delaying a hike.

It could also offer long-term loans to banks on more generous terms and may tweak its guidance on how long it plans to invest cash from maturing bonds back into the market.

Policymakers can afford to wait before taking more concrete steps, hoping for growth to pick up in the coming months and letting markets do its work for now by shifting rate hike expectations as data disappoint.

Investors now see a hike only in mid-2020, keeping borrowing costs low, even without explicit commentary from the ECB.

With Thursday's decision, the ECB's deposit rate, now its main benchmark, remains at -0.40 per cent while the main refinancing rate, its key rate during normal times, stands at 0.00 per cent.

REUTERS