By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank left its policy stance unchanged as expected on Thursday but its president Mario Draghi acknowledged risks to euro zone growth were now tilted to the downside.
The euro zone economy is already suffering its biggest slowdown in half a decade, raising questions over whether the ECB will be able to increase interest rates for the first time in a decade later this year as its current guidance indicates.
That guidance was left unchanged on Thursday but Draghi’s comment will increase market speculation that the bank will delay a tightening in policy or even move to cut rates.
“The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties,” Draghi told a news conference, citing trade and geopolitical threats and emerging market volatility.
“The near-term growth momentum is likely to be weaker than previously expected.”
Draghi nonetheless reeled off reasons for not changing policy now, notably pointing to the strength of the region’s labor market and rising wage growth, which he said would help push underlying inflation up over the medium term.
“The key factor to assess is the persistence of the uncertainty,” he said, adding he was confident that those uncertainties — ranging from the outcome of Brexit to China’s slowdown and trade protectionism — were being addressed.
He said the Bank’s Governing Council was unanimous both in acknowledging the growth slowdown and the factors causing it. On whether the ECB could provide new loans to banks, called Long-Term Refinancing Operations or LTROs, he said those had been raised by several policymakers but that no decision was taken.
Having ended a landmark 2.6 trillion euro ($3 trillion) bond purchase scheme just weeks ago, the ECB said on Thursday 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.
Some policymakers have in the past objected to changing the risk assessment since such a move would naturally raise expectations of policy action and the ECB is not yet prepared for such a move and certainly not weeks after ending its biggest stimulus scheme.
A guidance tweak not accompanied by a policy move would create an impression that policy is not in sync with policymakers’ assessment of the economy.
Investors see a rate hike only in mid-2020 while a Reuters poll of economists predicted the first rise in nearly a decade in the fourth quarter.
With Thursday’s decision, the ECB’s deposit rate, now its main benchmark, remains at -0.40 percent while the main refinancing rate, its key rate during normal times, stands at 0.00 percent.
($1 = 0.8798 euros)
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Source: Investing.com
