The European Central Bank (ECB) left monetary policy untouched on Thursday, with President Mario Draghi lowering the bank’s growth risk assessment, citing several headwinds worldwide.
Following the rate decision Draghi stated that risks surrounding the euro area growth outlook have now moved to the downside on account of the persistence of uncertainties related to the geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.
Draghi also confirms the ECB’s stance to maintain benchmark interest rates at their current level through the summer of 2019 and longer if necessary.
The ECB, however, did not adjust its guidance on how long it intends to invest cash from maturing bonds back into the market. These purchases are intended for keeping borrowing costs down through to sometime in 2021.
The bank’s repurchase scheme will also continue for an extended period of time.
ECB’s €2.6 trillion ($2.96 trillion) stimulus program was introduced in March 2015 in an effort to bolster the euro zone economy from deflationary forces and restore confidence. That program ended in December, which means bond purchases were down from €15 billion to zero.
Stilll, growth seems weaker than anticipated a few weeks ago. A poll on Thursday showed business activity across the euro zone barely climbed at the start of 2019. January reading for Flash Composite Purchasing Managers’ Index (PMI) was the weakest since July 2013.
Euro zone’s largest economies, Germany, France, and Italy all posted a deceleration in expansion in the fourth quarter.
A German investment bank said earlier even if the balance of risks does not formally change, they would expect a sufficient shift in tone to signal the same thing.
The problem with lowering risk assessment is that such a change in ECB’s guidance would naturally stir expectations of policy action.
Not Stopping Anytime Soon
The decline in economic growth, initially seen as temporary, shows no sign of stopping.
Manufacturing dropped near the end of last year, while export expanded slower than anticipated and sentiment gauges are sliding toward multi-year lows.
The expected increase in underlying inflation did not occur as well and employment is growing at a slow rate, a concerning sign for wages and inflation.
All that points to a slowdown in the euro zone, suggesting that inflationary pressures might take longer to build, putting the central bank’s credibility to the test, which has fell short of its price growth target since early 2013.
If growth continues to struggle, the ECB will be pushed to signal record low rates for even longer, providing further stimulus by postponing a rate increase.
Lawmakers can afford to be patient before executing more firm steps, hoping for growth to improve in the coming months and allowing markets do its work for the time being by shifting rate hike forecasts as data disappoint.
Investors now see a rate hike only in mid-2020, keeping borrowing costs low, even without clear remarks from the ECB.
Get updated on the latest market happenings. Subscribe now to FSMNews. FSMNews gives you the latest on what’s happening on forex, commodities, stocks, technology, economy and a lot more.