ECB’s Draghi backs expectations for late 2019 rate hike

FAN Editor
FILE PHOTO: The headquarters of the European Central Bank and the Frankfurt skyline with its financial district are photographed on early evening in Frankfurt
FILE PHOTO: The headquarters of the European Central Bank (ECB) and the Frankfurt skyline with its financial district are photographed on early evening in Frankfurt, Germany, March 25, 2018. REUTERS/Kai Pfaffenbach/File Photo

July 28, 2018

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank’s president backed investor expectations for a rate hike in October 2019, saying on Thursday the risks from an unpredictable global trade conflict did not warrant any deviation from its plan now.

Mario Draghi struck a relatively upbeat tone on the economic outlook and reaffirmed plans to end the central bank’s 2.6 trillion euro stimulus program this year and keep rates at their record low level “through the summer of 2019”.

Asked to unpack this formulation, which has given rise to diverging interpretations by investors and even policymakers, Draghi said market expectations were “very well aligned” with the central bank’s own.

Money markets currently price in a 10 basis points increase in the ECB’s deposit rate in October 2019, in what would be the first hike since 2011 after years of monetary largesse.

“As far as pure (market) expectations are concerned, they are very well aligned with the anticipation of the Governing Council,” Draghi said.

Sources told Reuters earlier this month ECB rate-setters were split over when the ECB might raise interest rates and the very meaning of “through the summer”. Some said an increase was possible as early as July 2019 while others ruled out a move until autumn.

Draghi said on Thursday they did not feel the need to change that wording.

“At this stage, we don’t see the need to modify or to add new language to our forward guidance on rates,” Draghi told reporters.

He added that the ECB would follow its capital key, the amount of capital each member central bank has paid in, when deciding how to reinvest the cash it will receive from maturing bonds from next year, without providing more details..

A key challenge is that the remaining maturity of the bond pile declines over time, so the ECB will have to decide whether to target longer-dated bonds or to accept the natural aging of its portfolio.

(For a graphic on ‘ECB policy vs. inflation and bond yields’ click https://reut.rs/2JPYo6Y)

UPBEAT ON GROWTH

Draghi played down the recent stream of mostly disappointing economic data and said the central bank continued to expect solid and widespread economic growth.

The composite PMI indicator dipped in June, consumer confidence eased and the German IFO business climate index for July fell – all pointing to a slowdown that might mean the ECB lowers its growth projections when it publishes new forecasts in September.

Draghi did point to some signs of weakness that have started to emerge in the bloc’s economy. Exports have lost some momentum, he said, while a global trade war would change the picture altogether if it snowballed.

“Clearly a trade war where you would have rounds of retaliation and rounds of responses, would create an entirely different climate.”

There were hopes though it could be avoided after U.S. President Donald Trump and European Commission head Jean-Claude Juncker said on Wednesday that they would negotiate rather than rush into imposing trade tariffs on each other.

“We took note of that, Draghi said. “It’s too early to assess the actual content… “But if one can say something general, it is a good sign.”

(Reporting by Balazs Koranyi and Francesco Canepa; Writing by Marc Jones; Editing by Hugh Lawson and Jon Boyle)

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