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Today the European Central Bank chose to hold off on any change to interest rate policy in light of weak economic growth reports released earlier today and throughout the last few months.

Key Takeaways

• The ECB stated that interest rates are likely to remain unchanged throughout the summer of 2019, and perhaps longer.
• The Euro dipped lower today following the very weak PMI report from IHS Markit.
• ECB President Mario Draghi stated in a press conference today that risks for the euro area growth outlook have moved to the downside.

The report showed almost no growth despite the 2.6 trillion euro bond-buying scheme recently ended by the ECB. The bond-buying scheme was introduced in March 2015 to counteract deflation and rebuild confidence in the embattled EU economy.

Bond purchases recently dropped from 15 billion euros a month to zero, bringing the crisis-era quantitative easing measures of the last four years to a close even in the face of further economic difficulties.

The ECB aims to reinvest money from maturing bonds for a time beyond the next rate hike in order to keep borrowing costs down until approximately 2021. The ECB announced that it plans to continue its repurchase program for an extended period of time.

With poor growth reports in Q4 2018 and a very poor start to the new year according to today’s IHS Markit report, fear of an impending recession is growing. The Federal Statistics Office recently stated that Germany grew 1.5% in 2018 compared to 2.2% in 2017, the weakest growth in 5 years.

Instability in Europe

The so-called “yellow vest” movement continues to disrupt the French economy as the country sees its tenth consecutive week of social unrest, with rioters in the streets initially protesting higher fuel taxes in mid-November. The taxes have been scrapped in an effort to appease protestors, but the movement has gathered momentum and is now continuing as a wider protest against the government in general.

The EU is still faced with the problem of the Italian deficit, with concerns over the country meeting its deficit target leading analysts to predict austere monetary policies from the government. Italy is targeting the deficit at 2.04% of GDP, but analysts believe that the slowdown in economic growth will lead to a higher figure.

Meanwhile, Brexit continues to impact the EU economy as the EU and Britain struggle to come to a deal agreement before the looming deadline, by which time Britain will be forced to crash out with a “no deal” Brexit which is predicted to have a severely negative effect on the UK economy and perhaps that of neighboring Ireland as well due to the close trading relationship between the two countries.

The International Monetary Fund has significantly reduced its growth outlook for 2019 and 2020, with the slowdown in Germany and Italy in particular influencing the outlook. The IMF and the Bank of England are among two bodies citing the uncertainty surrounding Brexit as a risk to the EU and UK economies.

Draghi: We continue to expect key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to our objective over the medium term.#ECB #DRAGHI pic.twitter.com/fPVl7RNJiG

— EGM Futures (@EgmFutures) January 24, 2019

Expert Outlook

"We need to realize that from a monetary perspective there is no ammunition left in Europe, (the) interest rate is at an all-time low, and also the QE (quantitative easing) program which we are now building down,” said DSM CEO Feike Sijbesma.
 So if we really get to an economic slowdown in Europe, I think the central banks and governments, from a monetary point of view, have no ammunition left to address it.”

“The biggest risk right now is that we talk ourselves into a recession,” said Natixis Chief Executive Officer Jean Raby. “The environment from the monetary-policy standpoint is likely to stay relatively stable and benign.”

In a press conference, ECB president Mario Draghi stated that “the risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.”

Market Reaction

Gold continues to dip following losses earlier in the day, last trading down -0.04% at $1,282.63 with a high of $1,284.72/oz and a low of $1,277.44/oz. The ECB rate decision report may offset negative pressure on the euro when traded against other currencies, but the statement from ECB President Mario Draghi that growth risks have now moved to the downside is likely to have a negative impact.