European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski
January 24, 2019
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – European Central Bank President Mario Draghi acknowledged on Thursday that risks to euro zone growth had shifted to the downside due to possible fall-out from factors ranging from China’s slowdown to Brexit
The region’s 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.
It left that guidance and interest rates unchanged at its meeting on Thursday but Draghi’s comment will fuel market speculation that the bank will end up delaying a tightening in policy or even move to cut borrowing costs.
“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.”
His comments pushed the dollar to a more than five-week high against the euro. The single currency was 0.45 percent lower against the dollar at $1.1329, after falling as low as $1.1308, its weakest since Dec. 17.
Despite citing the rising risks, Draghi nonetheless reeled off reasons for not changing policy now, notably 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.
“The Governing Council will give itself more time to assess whether all these risk factors have affected confidence and we are going to have another discussion in March when we will also have the new (growth) projections.”
Draghi said the 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.
RATES ON HOLD
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.
Draghi said on Thursday that the ECB did not see recessions as likely in Germany or Italy.
Some policymakers have in the past objected to changing the risk assessment since such a move would raise expectations of policy action and the ECB is not yet prepared for such a move just 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)
(Reporting by Balazs Koranyi and Francesco Canepa; Writing by Mark John; Editing by Catherine Evans)
