Monday 19 August 2019

ECB rate cut to come this autumn, S&P predicts

Donald Trump has backed a weaker dollar
Donald Trump has backed a weaker dollar

David Chance

With economic growth slowing, inflation stuck at just 1pc and global trade wars gaining traction, the European Central Bank is set to start cutting interest rates even closer to zero, ratings agency S&P said in a report yesterday.

The Federal Reserve, which moved far ahead of the ECB and managed to raise interest rates from the rock-bottom levels hit in response to the global financial crisis, is expected to move by the end of this month with its first rate cut in 10 years.

"Against this backdrop, the ECB has little choice but to loosen monetary policy further this year," S&P said, adding that it expected the central bank to lay the groundwork for a rate cut at its meetings in the middle of this year, while an actual cut could come in September.

The case for a rate cut in the eurozone would be strengthened, S&P said, if cuts by the Federal Reserve led to a weaker dollar, something US president Donald Trump has said he wants, as that would lead to exports from the eurozone becoming more expensive in dollar terms.

The ECB has spent most of the past five years insisting that inflation would rise to its 2pc target, although data also released yesterday showed inflation in the eurozone was just 1.3pc in June.

It also said it expected to be raising interest rates by this autumn, before it shifted its policy expectations to cuts.

S&P said it did not expect the ECB to be able to raise interest rates before the second quarter of 2021.

With rate cuts on the way, there is a risk that the main outcome of the ECB's actions could be to inflate asset prices further as it also restarts quantitative easing via bond purchases, Tom McDonnell, senior economist at the Nevin Economic Research Institute warned.

"It will not be effective in the same way it was last time," he said, noting that bond yields were already in many cases now at or below zero, whereas they were much higher in 2009.

"I fear for the ECB's ability to counteract a crisis," Dr McDonnell said during a briefing on the institute's quarterly outlook for the Irish economy.

Nevin expects the Irish economy to grow by 4.6pc this year, well above the 4pc expected by most other economic forecasters, while even if there is a cliff edge Brexit after October 31, it will not hit hard this year, as businesses in the UK will stockpile.

In the event of a hard Brexit, Dr McDonnell said he expects growth could come in at 4pc for 2019, with a much larger impact in 2020, although even then he noted that the effects were hard to measure.

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