Why 2019 Could Be an Inflection Point for the ECB

As the Federal Reserve toys with slowing down the pace of
rate hikes, attention will now shift to other central banks. Among them, the
European Central Bank (ECB) will be watched closely. This is because after the
Fed, it is the most powerful central bank in the world. It also controls the
second-most used currency in the world after the United States dollar. This
year, the EUR has fallen by almost 4% against the USD.

As the global financial crisis started, the world’s central
banks reacted by bringing down the cost of lending. They did this by easing the
monetary policy. In theory, this was supposed to spur inflation by increasing
the spending. As the global crisis came to an end, the European economy started
developing its own problems with countries like Spain, Cyprus, and Greece
asking for assistance. At this time, the ECB governor, Mario Draghi said that
he would do whatever it took to save the EU. The ‘whatever it takes’ statement
is viewed as the one that saved the euro.

Part of it included moving the region’s rates to the
negative territory and starting the quantitative easing (QE) program. QE is a
program where the bank prints money with the goal of purchasing assets like
mortgage backed securities and government-backed bonds. In total, the size of
the QE program is estimated to be worth more than €2.5 trillion.

This year, the bank announced that the program will come to
an end in December this year. At the same time, the bank announced that it will
likely start rising interest rates ‘through summer’ of the coming year. In the
EU, summer runs from mid-June to late-August. This means that the earliest the
bank could raise rates will be in September.

However, there is a likelihood that the bank will not follow
through with this prediction. This is because recent data from the region shows
a region whose growth is slowing. A month ago, the European Commission lowered
its GDP guidance for the coming year. The ECB has also said that that the
growth this year has been ‘somewhat weaker than expected.’ Globally, IMF has
also lowered its guidance on the economy. While the inflation of the region is
expected to remain at 1.7% in the coming year, there are chances that it could
slow.

In addition to this, it seems that talks between the US and
the European Union on trade have stalled. As the country intensifies its
negotiations with China, the Trump administration could turn its attention to
the European Union. In the past, he has targeted the automobile industry. If he
moves ahead and raises the tariffs, it could further lead to a slowed EU
economy.

Therefore, a combination of a weaker EU economy,
lower-than-expected inflation, and an unsupportive economy could reduce the
chances of a rate hike in the coming year. Couple all this with the chances of
political instability in the region and a disorderly Brexit and see that
chances of a rate hike are a bit low. This is because it is usually disastrous
for the central bank to raise rates at a time when the growth is slowing.

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