ECB Cuts Growth Forecasts as It Ends Bond-Buying Program--2nd Update
December 13 2018 - 12:04PM
Dow Jones News
By Tom Fairless
FRANKFURT -- The European Central Bank cut its economic growth
forecasts Thursday, highlighting the risks confronting Europe's
economy even as it ended its massive four-year stimulus
program.
"It's a climate of great uncertainty," ECB President Mario
Draghi said at a press conference, citing trade tensions,
vulnerabilities in emerging markets and volatility in financial
markets. He spoke after the ECB confirmed it would keep its key
interest rates -- which include a minus 0.4% rate on bank deposits
held at the central bank -- unchanged at least through the summer
of 2019.
Mr. Draghi's comments signal a deepening concern among senior
ECB officials over the state of the 19-nation economy, which has
slowed sharply in recent months after outpacing the U.S. in 2016
and 2017. Officials had maintained until recently that the slowdown
reflected temporary factors that would soon pass.
Analysts said the change of tone suggested the ECB might delay
lifting interest rates out of negative territory, where they have
languished since mid-2014.
"The ECB is turning more cautious," said Florian Hense, an
economist at Berenberg Bank in London. Top officials "will have
their fingers crossed that the economy does not disappoint their
growth expectations too much."
The euro slipped against the dollar during Mr. Draghi's news
conference to $1.133, as investors digested the ECB's more dovish
tone. The common currency has slid 9% against the dollar since
February, as the Fed increased interest rates three times this
year, but the ECB signaled it would be slow to follow suit.
The eurozone slowdown sits uncomfortably with the ECB's decision
to end new purchases under its EUR2.6 trillion ($3 trillion)
bond-buying program this month, a move that the bank confirmed on
Thursday. That decision was signaled earlier this year and comes
years after the Federal Reserve and Bank of England wound down
their own bond purchases.
The ECB lowered its 2018 forecast for gross domestic product
growth in the eurozone by 0.1 percentage point to 1.9% and shaved
its 2020 forecast by a similar amount to 1.7%.
Some analysts questioned the bank's decision to press ahead with
ending QE despite the weakening economy.
"The decision to end QE now is more about politics than
economics," aimed at assuaging ECB officials who have been critical
of the bank's bond purchases, particularly its German contingent,
said Paul Diggle, an economist at Aberdeen Standard Investments.
"If you squint hard enough, the economic data can just about
justify the decision."
The ECB softened its decision on QE by pledging to hold its
EUR2.6 trillion stock of bonds for "an extended period of time"
after its first interest-rate rise, which investors have penciled
in for late 2019.
A key concern for ECB officials is Italy, whose $2 trillion
economy shrank in the three months through September, aggravating
concerns around the country's weak banks and high government debt.
But weaknesses have also emerged elsewhere: Germany's economy
contracted in the most recent quarter, and the outlook for France
is also softening as President Emmanuel Macron faces mass protests
over his economic reforms.
John Taylor, a portfolio manager at AllianceBernstein in London,
said the ECB missed an opportunity to phase out its stimulus
program a year ago when the economy was in much better shape.
"The longer borrowing costs are left low, the more debt is taken
on, the more it affects behavior," Mr. Taylor said. "Investors are
now more sensitive to higher credit spreads because there's more
debt."
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
December 13, 2018 11:49 ET (16:49 GMT)
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