As the clock ticks down on Mario Draghi’s nonrenewable, eight-year term as president of the European Central Bank, economists see it as increasingly likely he will leave the post without ever having delivered a rate hike.
Draghi’s term is up at the end of October. But some economists think policy makers could move as early as Thursday to answer that question by tweaking the forward guidance in the ECB’s policy statement.
In January, the ECB reaffirmed that it won’t move its ultralow rates, including a deposit rate that stands at -0.4% and a main lending rate at 0%, until at least the end of summer. Marco Valli, chief European economist at UniCredit, argued in a note late last week that “important communication changes might already be in store…with a rising likelihood that the ECB will respond to the weaker growth and inflation outlook by tweaking its forward guidance to delay the expected timing of the first rate increase from after the summer to early next year.”
A tweak isn’t the consensus view. But a slowing eurozone economy that saw Italy meet a widely used definition of recession — consecutive quarters of shrinking gross domestic product — at the end of 2018 and persistently lackluster eurozone-wide data increasingly have investors looking for ECB staff to cut its macroeconomic forecasts on Thursday and for the Governing Council to at least lay the groundwork for another round of cheap, multiyear loans, known as targeted long-term refinancing operations, or TLTROs, in future months.
The ECB began cutting interest rates in 2011 as Draghi took the helm. It continued to cut amid the eurozone debt crisis while also extending an array of extraordinary measures, including the 2015 launch of a bond-buying program in its own effort at what is known as quantitative easing. The bond-buying initiative ended in December.
But with the aforementioned sluggish economic data, worries about trade and a central bank president on his way out, 2019 might not be the year rates begin to rise. Some economists worry that with rates so low, the ECB has little leeway if the economic picture substantially worsens.
“It’s unfortunate timing for [the ECB]. But they need to get a move on,” said Simona Mocuta, senior economist at State Street Global Advisors, whose baseline forecast still calls for one rate rise in 2019.
“In 2017, they missed an opportunity to hike,” Mocuta said. While stopping short of calling it a policy mistake, the lack of a move was a “missed opportunity,” she said.
In fact, noted Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, it’s often argued that the justification for not delivering a second-half rate hike is that Draghi wants to avoid repeating the policy “mistake” of his predecessor, Jean-Claude Trichet, under whom the ECB twice hiked in the first half of 2011 only to cut rates in the second half as the eurozone debt crisis deepened.
However, Vistesen said market participants may be underestimating the reluctance of some policy makers to face the threat of a deep downturn with a deposit rate at -0.4%.
“We see a high probability of a compromise with markets in the next 6 to 12 months. In this scenario, the central bank will edge the deposit rate higher, but also extend the TLTROs, or introduce new ones, and reinforce its forward guidance beyond the point at which the deposit rate has reached zero,” he said, in a note. He emphasized, however, that such an outcome would happen only if eurozone economic data stabilize.
“I don’t think the ECB will hike this year,” said Alessio de Longis, portfolio manager and macro strategist at Oppenheimer Funds. “Plus, Draghi is leaving in the fall. I think we will get another LTRO, which is pretty much already priced in.”
Meanwhile, uncertainty remains over Draghi’s successor, who will be determined in a round of horse trading by European leaders. Some economists question whether policy makers would want to tie the hands of Draghi’s successor when it comes to the timing of the next rate move by declaring rates will be on hold until 2020.
The appeal of such a move, however, is that the ECB’s rate view would be “more aligned with that of financial markets, helping the central bank preserve the current degree of monetary accommodation that is needed to push inflation back towards target,” Valli said. “If the ECB decides to stick to its rate guidance for now, a change would probably be needed by June.”
On Wednesday, one day ahead of the central bank’s next policy meeting, European equities
traded modestly higher, while the euro
was little changed at $1.1306.
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