As the Federal Reserve toys with slowing down the pace of rate hikes, attention will now shift to other central banks. Among them, the European Central Bank (ECB) will be watched closely.
This is because after the Fed, it is the most powerful central bank in the world. It also controls the second-most used currency in the world after the United States dollar. This year, the EUR has fallen by almost 4% against the USD.
As the global financial crisis started, the world’s central banks reacted by bringing down the cost of lending. They did this by easing the monetary policy. In theory, this was supposed to spur inflation by increasing the spending. As the global crisis came to an end, the European economy started developing its own problems with countries like Spain, Cyprus, and Greece asking for assistance.
At this time, the ECB governor, Mario Draghi said that he would do whatever it took to save the EU. The ‘whatever it takes’ statement
is viewed as the one that saved the euro.
Part of it included moving the region’s rates to the negative territory and starting the quantitative easing (QE) program. QE is a program where the bank prints money with the goal of purchasing assets like mortgage backed securities and government-backed bonds. In total, the size of the QE program is estimated to be worth more than €2.5 trillion.
This year, the bank announced that the program will come to an end in December this year. At the same time, the bank announced that it will
likely start rising interest rates ‘through summer’ of the coming year. In the
EU, summer runs from mid-June to late-August. This means that the earliest the bank could raise rates will be in September.
However, there is a likelihood that the bank will not follow through with this prediction. This is because recent data from the region shows a region whose growth is slowing. A month ago, the European Commission lowered
its GDP guidance for the coming year. The ECB has also said that that the
growth this year has been ‘somewhat weaker than expected.’ Globally, IMF has also lowered its guidance on the economy. While the inflation of the region is expected to remain at 1.7% in the coming year, there are chances that it could slow.
In addition to this, it seems that talks between the US and the European Union on trade have stalled. As the country intensifies its negotiations with China, the Trump administration could turn its attention to the European Union. In the past, he has targeted the automobile industry. If he moves ahead and raises the tariffs, it could further lead to a slowed EU economy.
Therefore, a combination of a weaker EU economy, lower-than-expected inflation, and an unsupportive economy could reduce the chances of a rate hike in the coming year. Couple all this with the chances of political instability in the region and a disorderly Brexit and see that chances of a rate hike are a bit low. This is because it is usually disastrous for the central bank to raise rates at a time when the growth is slowing.