ECB ACTS – ACKNOWLEDGES THE SLOWDOWN

about 3 months ago

Today evenings European Central Bank (ECB) meet was very crucial as the Eurozone itself is at a very decisive stage. The impending Brexit has already caused havoc in the zone and added to that was the ongoing trade war between US and China, which dealt a body blow to the exports across all European nations. In fact export growth collapsed to zero at the end of 2018 ad ongoing policy uncertainty is weighing on business investment.

The OECD slashed the growth estimates for the bloc – it expects Eurozone gross domestic product to grow just 1% in 2019 and 1.2% in 2020. It has warned that if Brexit happens in a “disorderly” manner, a likely recession in the UK would be a major adverse shock for Europe. Just ahead of this meet of ECB, the OECD called for concerted action by Eurozone governments, including fiscal stimulus from those with such scope, to restore growth and boost job creation.

Thus in this background, Mario Draghi, President of the ECB was largely expected to do two things – do nothing with the interest rates and announce another round of stimulus or lay the ground for targeted long-term refinancing operations, or TLTROs. It was a given that he would announce a much lower forecast for the Eurozone economy and there was anticipation over the tweaking of the time line for the interest rates.

And that is exactly what the ECB did – announced a new round of monetary stimulus, much more than what was expected, sending the bond yields southwards. Three months ago, the ECB phased out the $2.9 trillion bond-buying program, and now it has earned the distinction of being the first rich-country central bank to ease policy to acknowledge the global slowdown. The first loans will be launched in September, each with a maturity of two years. The interest rate will be indexed to the main-refinancing rate over the life of each operation. Like the offers earlier, this new package too will have built-in incentives to keep credit conditions favorable.

In the January policy, the ECB had said that it had no intentions of moving its ultralow rates – deposit rate of -0.4% and lending rate of 0%, at least until the end of summer. But that guidance needed to be tweaked given the challenges ahead. So today, Draghi said interest rates would be held at the current levels at least through the end of this year.

This delay of the expected timing of the first rate hike was justified with a lower guidance on the economy. The ECB slashed is forecast for GDP for 2019 to 1.1% from 1.7% in December. It lowered its inflation projection to 1.2% from 1.6%, much below the ECB’s target of just under 2%.

Despite the OECD’s grim outlook, Draghi did not get into any extreme mode like cutting rates further or once again starting the bond buying program. As he so rightly said in the Press Conference, “In a dark room, you move with tiny steps.”

What does this mean for the Indian markets? Nothing directly but because we live in a flat world now, if globally things go well, it augurs well for our markets. Brexit also directly has no major impact on India but all global happenings, good or bad, have more of a psychological effect. And when sentiments are what rules the markets, global mood swings also matter.

Well, after the ECB meet, the global stocks fell as the worry is now about the health of the global economy. This could percolate into our Indian markets too but the next trigger could be trade deal between China and USA. We of course await the election dates….

Popular Comments