Tuesday 17 July 2018

Draghi bets eurozone can ride out storm as QE to end

ECB President Mario Draghi. Photo: REUTERS
ECB President Mario Draghi. Photo: REUTERS

Piotr Skolimowski and Gavin McLoughlin

European Central Bank (ECB) president Mario Draghi said the eurozone economy is strong enough to overcome increased risk, justifying the ECB's decision to stop buying bonds.

Policy makers agreed to phase out the stimulus tool, known as quantitative easing, with €15bn of purchases in each of the final three months of the year, the ECB president said after his governing council met yesterday.

The ECB also said it expected to keep interest rates unchanged at current record lows at least through the summer of 2019 in a move that surprised many observers. In doing so, officials bet that the eurozone economy is robust enough to ride out an apparent slowdown amid risks including US trade tariffs and nervousness that Italy's populist government will spark another financial crisis.

"We've taken these decisions knowing that the economy is in a better situation, with an increase in uncertainty," Mr Draghi said at a briefing in Riga, where the Frankfurt-based ECB held its annual out-of-town meeting.

In Ireland, the Central Bank warned that an abrupt negative change to market conditions is one of three systemic risks facing the Irish economy. It said this risk had intensified in the early part of the year, amid a spike in Italian bond yields on the back of the new government. The other risks it flagged are high debt levels in the public and private sector, and high levels of non-performing loans at the banks. The Central Bank said the intensity of these risks were unchanged since its last macro-financial review in December.

The ECB announcement came only hours after the Federal Reserve raised US interest rates for the second time this year, highlighting how a decade of easy money in Europe and America is gradually coming to an end.

The euro fell on the outlook for interest rates, trading 1.2pc lower at $1.1647 at 5.12pm in Frankfurt. Before the decision, economists had predicted borrowing costs would rise around the middle of next year. Mr Draghi also unveiled updated economic forecasts saying economic growth should slow to 2.1pc this year, compared with its previous forecast of 2.4pc.

Conor Haugh, head of retail consumer business at Bank of Ireland, said: "While the kneejerk market reaction was to sell the euro, when the dust settles on today's alterations from the ECB, we expect today's changes to be viewed as another step along the ECB normalisation process which should give the euro a short-term boost.

"However, for more sustained gains for the euro over coming months we'll need to see greater confidence restored in the eurozone growth outlook for the second half of this year."

Alan McQuaid, chief economist at Merrion Capital, said he wouldn't be surprised if ECB interest rates weren't increased until after Mr Draghi finishes his term as ECB president in October 2019.

But he said even a small interest rate hike could have a significant negative impact on Irish consumers. The Central Bank warned yesterday that Irish households are highly indebted and vulnerable to interest rate shocks. Conall Mac Coille, chief economist at Davy stockbrokers, said when rates rise it will lift the cost of Irish government borrowing. But he said he does not expect an aggressive series of rate hikes after the ECB move. (Additional reporting Bloomberg)

Irish Independent

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