ECB April Meeting Preview – Holding Steady, For Now

Forward guidance unlikely to change. ECB could buy time till June.

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The European Central bank will be holding its monetary policy meeting tomorrow. President Mario Draghi and the governing council will be keeping monetary policy unchanged.

This comes as the central bank announced policy changes at the previous meeting in March. The ECB started a new round of cheap financing for banks in order to provide more liquidity into the markets.

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The new cheap loans come as the ECB ended its Quantitative Easing policy in December last year, hoping that it would follow through with rate hikes later this year. But a surprise downturn in the economy saw the ECB taking another look at its monetary policy.

ECB Main Refinancing rate
ECB Main Refinancing rate

Officials are currently mulling over the slowdown. Recently, some leading economic institutes in Germany cut the growth forecasts for the eurozone’s leading economy. The cut in growth reflects the overall slower pace of growth for the eurozone.

Economists have been blaming the wider global slowdown and the trade tensions between the United States and China. At one point, Germany’s slower growth was attributed to the changes to auto emissions. The automobile industry did get hit hard, but this was only temporary.

The economic data since the previous meeting in March also provides little to no clear details on whether there have been any improvements in the economy.

Eurozone Economic Data Recap

At the time of writing, data has been somewhat mixed. Here’s a quick summary of the events:

  • Final manufacturing PMI stays below the 50-level for a second consecutive month at 47.5
  • Flash inflation estimates show headline CPI rose just 4% on the year in March, while core inflation rate grew just 0.8%. Inflation in March was significantly weaker than the previous month
  • Final services PMI surprises to the upside, rising to 53.3 and coming out higher than the initial flash estimates
  • Retail sales rise 0.4% in February, marking two consecutive months of increase
  • Germany’s industrial production rises 0.7% following an unchanged print from the month before
  • German factory orders disappointed, falling 4.2% on the month in February

Germany still remains the key to the puzzle. After posting strong growth just a few years ago, growth stalled.

ECB Meeting Minutes – March

Policy makers at the European Central Bank were apparently discussing more aggressive stimulus measures. This comes in a bid to support the stalling economy. The governing council spoke about taking fresh action in order to shore up growth, according to the latest ECB meeting minutes.

Policymaker concerns about the current soft patch in growth were the main takeaway from the monetary policy meeting minutes in March. There, the central bank was unveiling a new set of cheap loans for banks. There were also promises from the central bank not to hike interest rates at least until the end of the year.

Some members were of the opinion that the ECB should not hike interest rates until March 2020.

But at the same time, member concerns also grew on the prolonged use of negative interest rates. The minutes showed that at least one member of the governing council wanted a reassessment of the central bank’s unconventional monetary policy tools.

Concerns About Negative Interest Rates

Similar to the concerns raised by policymakers in Japan, the ECB’s governing council is also facing the same issues. The ECB cut interest rates to zero in March 2016 while also lowering the deposit rate to -0.4%.

It is over close to three years now but there has been no evidence of sustained growth in the eurozone. Continuous use of negative interest rates impacts the bank’s performance. While negative rates were initially seen as a way to boost lending, three years later, it has proven otherwise.

While the concerns remain, officials are unlikely to take any major decisions this month. The ECB is also likely to maintain its forward guidance at least until the June monetary policy meeting.

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