OLIVER MANGAN: Amid the Brexit uncertainty, ECB rate hike delays may offer some comfort
As expected, last week’s meeting of the ECB Governing Council concluded with no changes to interest rates from 0% for the refinancing rate and –0.4% for the deposit rate
However, the ECB did make some significant announcements on monetary policy, which point to rates remaining at very low levels for an even longer period of time.
In particular, the ECB pushed out the timing of its guidance on when interest rates might first start to rise.
It is now guiding that rates are on hold “at least through the end of 2019” from its previous reference to until the end of summer 2019.
Indeed, in his press conference, ECB president Mario Draghi noted that several members of the Governing Council wanted to change the guidance on rates staying unchanged until March 2020.
The other key decision from the ECB was the launch of a new round of targeted longer-term refinancing operations, or so-called Tltros.
Starting in September 2019 and ending in March 2021, this repo liquidity facility will have a maturity of two years and provide funding to banks at very low interest rates.
The aim is to help preserve favourable bank lending conditions in an environment of increased bank funding requirements, owing to the maturing of existing Tltros and other bank debt.
The rationale for the ECB’s announcements is the weaker and more challenging economic backdrop for the eurozone economy.
Not surprising, this was evident in the updated set of macro forecasts published by the ECB last week, which saw it sharply revise down its 2019 growth forecast.
It is now projecting GDP growth of 1.1% for this year, compared to 1.7% previously, with forecasts for moderate growth of 1.6% in 2020 and 1.5% in 2021. It noted that the risks to these forecasts remain tilted to the downside.
The March update of its inflation forecasts also saw downward revisions. Inflation is forecast at 1.2% in 2019, down from 1.6% previously, 1.5% in 2020 - from 1.7% - and 1.6% in 2021, from 1.8%.
Crucially, the updated projections show that the ECB now expects inflation to remain well below its 2% target over the next three years. President Draghi explained that the weaker economic momentum is slowing the upward movement of inflation towards target.
The market expectation now is that the ECB will not start to raise rates until September 2020, when a small hike of 0.1% is being factored in.
Rates are expected to rise at a snail’s pace thereafter. Futures contracts suggest the market is not factoring in a full 25 basis point rate increase until mid-2021.
Over the medium term, markets expect rates to remain low for an extended period.
Three-month rates are only expected to get back into positive territory around the end of 2021, and are envisaged to still be comfortably below 1% by the end of 2024, in nearly six years’ time. This low-interest rate outlook is keeping the euro anchored at low levels against the dollar.
