Business World

Saturday 24 August 2019

Eurozone manufacturing misery adds rate cut pressure ahead of ECB meeting

Meeting: ECB president Mario Draghi and fellow policymakers are expected to lay groundwork for a rate cut. Photo: Reuters
Meeting: ECB president Mario Draghi and fellow policymakers are expected to lay groundwork for a rate cut. Photo: Reuters

David Chance

The European Central Bank is set to announce a shift to looser policy later today, as data showing European manufacturing slumped to its weakest level in six years, with Germany at a seven-year low, made the case for rate cuts more urgent.

The purchasing managers index provides an early guide to economic performance, and the headline index fell to 51.5 from 52.2 in June, according to IHS Markit, a reading that economists said would translate into growth in the eurozone of just 0.2pc, quarter on quarter.

The manufacturing sector was hardest hit, recording a decline with trade tensions, Brexit and the woes of the German auto sector taking their toll.

Ireland has so far bucked the trend but elsewhere the slowdown is marked

Capital Economics noted that both input prices were static and output prices fell, indicating that rising wages were not going to feed through into higher prices and inflation, as the ECB had hoped, something that raises concerns over the ability of the eurozone to avoid falling into a renewed recession. "Overall, the PMI surveys support the conclusion that ECB policymakers already seem to have reached - that further loosening is needed," said the consultancy's senior European economist Jack Allen-Reynolds.

The ECB meeting later today will likely see its president Mario Draghi set out the case by changing the forward guidance on interest rates and bond purchases, before cutting the deposit rate in September and relaunching quantitative easing in November, he said.

Alongside the ECB, the US Federal Reserve is also set to cut interest rates, although unlike its Frankfurt-based counterpart, the Fed was quicker to provide emergency support for the economy, with the result that the United States is set for a record 10-year expansion.

In addition, having embarked on a series of interest rate rises since 2015, the Fed now has more room to cut than the ECB, which raised rates at the height of the crisis and was forced to back down, and is still close to a zero level.

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