ECB Preview: With lower growth ahead, chances of a rate hike in 2019 are all gone

  • The ECB Governing Council is expected to acknowledge the slowdown of the Eurozone economy that goes beyond its expectations at the beginning of 2019.
  • The IMF lowered its global economic outlook for advanced economies because of downward revisions to growth in the Eurozone. 
  • Given the global growth and Brexit-related uncertainties, the ECB is unlikely to alter its forward guidance on rates until June.

The Governing Council of the European Central Bank is set to convene on its first meeting after ending the asset purchasing program in December last year on Thursday, January 24  with the policymakers supposedly acknowledging that the current Eurozone slowdown went beyond their expectation.

The fact that the slowdown in the Eurozone is stronger than expected was voiced by the fresh release of the World Economic Outlook from the International Monetary Fund (IMF) that lowered the global advanced economies growth projections mainly because of lower than expected growth in the Eurozone. 

“Within the Euro area, the significant revisions are for Germany, where production difficulties in the auto sector and lower external demand will weigh on growth in 2019, and for Italy where sovereign and financial risks, and the connections between them, are adding headwinds to growth,” the wrote in a summary of economic forecast for the global economy on Monday, January 21.

The Eurozone economy is now expected to rise 1.6% over the year in 2019 with the growth picking up to 1.7% in 2020. German GDP forecast was lowered the IMF to 1.3% in 2019 after the German economy rose at the slowest pace in five years in 2018 at 1.5% y/y. The economic growth in Italy is forecast at a mere 0.6% in 2019, down from 1.0% in 2018 before recovering to 0.9% in 2020.

The forward-looking indicators like PMIs are clearly decelerating with the business activity at multi-year lows and prospects remain muted amid ongoing trade-war uncertainty coupled with the negative Brexit-related implications.

The ECB President Mario Draghi pioneered in providing a dimmer outlook for the Eurozone economy while talking to the European Parliament members last week saying that ”recent economic developments have been weaker than expected.”

The December staff macroeconomic projections projected 1.7% growth for the Eurozone in 2019 and while fresh forecast will only be available in March, it is likely that the entire Governing Council will acknowledge prospects for lower growth and remain even more dovish in terms of the outlook for monetary policy.

The likelihood of the ECB hiking rates in September is being priced out and the market is currently expecting the ECB to remain on hold with policy rates for the rest of this year. 

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