ECB Trims Eurozone Economic Outlook

March 7, 2019
ECB Trims Eurozone Economic Outlook March 11, 2019 Lennox Hamilton

On Thursday, the European Central Bank axed the growth and inflation target of the euro area, citing constant uncertainties, primarily external, and provided banks with more money through long-term loans to encourage lending to a weak economy.

The bank also stated that it now anticipates interest rates in the euro area to stay unchanged at least until the end of 2019 and even further, until inflation rises close but ‘below the 2%’ target.

The eurozone growth prospects for 2019 were reduced to 1.1 percent from 1.7 percent in December, as shown by the macroeconomic projections of the ECB in March 2019. Next year’s outlook has been reduced to 1.6% from 1.7%. The forecast for 2021 remained at 1.5 %.

Because of the of the of the of the continued complexities associated with global political factors, the menace of trade protectionism and weaknesses in emerging markets, the inherent risks surrounding the eurozone’s growth perspective is still tilted towards the bottom, the ECB said.

In his introductory statement, ECB President Mario Draghi said “While there are signs that some of the idiosyncratic domestic factors dampening growth are starting to fade, the weakening in economic data points to a sizeable moderation in the pace of the economic expansion that will extend into the current year.”

“The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment.”

Draghi added that the considerably fragile economic momentum slows inflation adjustment to the intended level. For 2019, the bank trimmed inflation prospects to 1.2%, from 1.6% in December. The projections for next year were reduced to 1.5% from 1.7%. The outlook for 2021 was reduced by 1.8% to 1.6%.

The deterioration in external demand and the impact of other countries and sectors on economic growth is indeed long lasting, the bank bank bank bank bank notes. That said, in future, the bank anticipates the impact of these detrimental factors to ease off.

While talking about the future oil prices, the ECB stated that headline inflation will probably stay at present levels before dropping by the end of 2019.

The bank said “Measures of underlying inflation remain generally muted, but labor cost pressures have strengthened and broadened amid high levels of capacity utilization and tightening labor markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.”

Earlier today, following the Frankfurt policy meeting, the Governing Council left vital interest rates unchanged, as anticipated. In July 2011, interest rates in the eurozone were hiked by 25 basis points.

The ECB said “The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2 percent over the medium term.”

The slight shift in the future interest rate guidance from “summer” 2019 to “the end” indicates the first rise in interest rates since the 2007-09 world financial crisis would take place in 2020 only. Currently, the primary re-financing rate is historic low of zero percent and the deposit rate is -0.40 percent. The marginal lending rate of lending is 0.25 %.

The Bank has stated that, beginning September 2019 and ending March 2021, it will begin a fresh string series of targeted refinancing transactions, namely TLTRO-III with two year maturity period. The promise of new TLTRO loans surprised many economists, who anticipated that this move would only be announced by the bank in April.

The ECB anticipates new loans to assist maintain advantageous bank lending circumstances and smooth fiscal policy transmission. In talking to reporters, Draghi said the newest policy decision was unequivocal, calling the rating body and its proceedings a good sign of coherence. The Chief of the Bank added that the Board of Directors is prepared to adapt all its policy instruments as needed. He said that lawmakers trust the reference point and concurred that the likelihood of a downturn in the eurozone was very small.

Draghi also stated that many lawmakers proposed expanding the future guidance calendar to March next year. As far as the TLTRO was concerned, the chief of the ECB said that nobody would take on these loans without offering subsidies. He also pointed out that negative interest rates were very effective and their impact on bank reserves was complicated. Precise offsetting initiatives must still be discussed by the ECB.

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