Thursday 20 June 2019

Analysis: Weak data means ECB may now delay raising interest rates


ECB president Mario Draghi blamed a “quasi-monopoly” among banks here for the high mortgage rates.
ECB president Mario Draghi blamed a “quasi-monopoly” among banks here for the high mortgage rates.
David Chance

David Chance

Italy is flirting with recession and France grew just 0.4pc in the third quarter of the year, according to data from Eurostat.

Ireland's data wasn't split out in the latest quarter, but with the economy expected to grow by 6.7pc this year, according to the Central Bank, it is now clear that the European Central Bank has to calibrate policy for 19 nations whose prospects are diverging sharply.

The result is that interest rate rises may be further away than expected.

It all looked so different in 2017. Europe was set for a sustained recovery and the world as a whole was enjoying synchronised growth. The ECB was on a path to exiting its bond purchases and, by autumn of next year a rate hike.

It is safe to say that Mario Draghi and his fellow central bankers will not be taking much account of Ireland when they set interest rates. At just 2.6pc of the 19-member currency bloc's economic output, the State barely registers, but Italy does and the latest growth data for the bloc as a whole was at the lower edge of the central bank's projections.

Policy as it stands is too tight for Italy, Spain, Portugal and Greece and too loose for Germany, Ireland and the Baltic states.

The ECB's bond-buying programme has slowed to €15bn a month from a peak of €80bn and outright purchases are set to cease by the year end, as a prelude to raising interest rates.

If the economic numbers released yesterday presage a downturn, the ECB will be caught between a rock and a hard place.

It has bought as much German debt as it is allowed to under the rules governing its programme which limit purchases to 33pc of the bonds of any country, and having defended those limits at the European Court of Justice it cannot just ignore them.

That means Ireland is going to be stuck with loose monetary policy for the foreseeable future.

Autumn 2019 is a long way off, but the risk now is that the ECB finds itself waiting for the next crisis before it can act.

Until then, cheap money will fuel property markets here and reinforce rising consumer spending power in an economy on the verge of overheating.

Sound familiar? Welcome back to the future.

Irish Independent

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