The European Central Bank moved away from its previous guidance on future rate hikes, as the new guidance suggests that a rate hike will likely take place in December rather than October of 2019. This was initially interpreted as no rate hikes for 2019, and this unexpected dovish comment pushed the Euro lower and European stock markets higher. However, Draghi’s speech clarified that the ECB has not ruled out this possibility but only delay it, even though he also suggested that some Governing Council participants believed that a rate hike should be delayed until 2020.
The reason behind this unexpected development lies in the deterioration of macroeconomic prospects for the Euro Area, as GDP was revised downwards quite significantly, to 1.1% in 2019 compared to 1.7%, even though in his speech he comments that the probability of a recession and the probability of a de-anchoring of inflation expectations are still very low. TLTROs were re-introduced as the previous round of funding is about to end, aiming, as Draghi commented, to support the improved bank funding position.
Draghi’s comments and the overall ECB stance are supportive of the view that a global slowdown will take place in 2019-2020. This is also in accordance to the OECD projections yesterday, which blame the trade war for the slowdown, exactly what we had suggested in previous posts.
The Chairman’s comments focus on international factors, suggesting that “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.”, while he also comments that “idiosyncratic domestic factors dampening growth are starting to fade”. The questions which begets an answer is whether domestically-oriented policies are expected to have the desired effect on growth, given that the threats are international.
While the overall central bank theme thus far has been focused on “wait-and-see”, the ECB went a step further as seeks “to preserve favourable bank lending conditions” through the TLTROs. As Draghi admitted, some sectors were more affected than others, hence it would be possible to infer that perhaps the TLTRO decision was driven by countries which have been most affected by the trade “discussions” and the subsequent trade slowdown, e.g. Germany and the Netherlands, and hence these are the ones we should place more attention to in the future.
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Dr Nektarios Michail
Market Analyst
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