By Tom Fairless and Paul Hannon
FRANKFURT -- The eurozone's economic slowdown has taken European
Central Bank officials by surprise, potentially disrupting their
plans to lift short-term interest rates this year.
The shift underlines the difficulties central banks face getting
back to growth rates and policy settings that were considered
normal before the global financial crisis.
In June, the ECB appeared to be on course to end its bond-buying
stimulus program at the end of 2018 and follow that with a first
rise in its key interest rate some time this year. Right now, it
charges banks 0.4% to deposit money with the central bank, a
negative interest rate.
So widespread was the expectation of the first rate rise since
2011 that policy makers issued a statement promising not to move at
least through the summer of 2019 to calm worries it might move too
soon.
Since then, disappointing data have made it clear that the
eurozone economy is weaker than the ECB expected. The ECB's
economists have cut their growth forecasts in each of their last
three reports on the economic outlook.
Now, many investors expect the ECB to do nothing until next
year. Some are considering what the bank could do to stimulate the
19-nation eurozone economy if it sinks.
"The narrow window in which the ECB could have lifted its key
interest rate from emergency, negative levels, has closed," said
Simon Wells, an economist with HSBC in London. He expects the ECB
to hold its deposit rate at current levels through at least the end
of 2020, having previously forecast a first 0.15 percentage-point
ECB rate increase for September.
The ECB outlook reflects a global shift in central banking.
Federal Reserve officials -- unsettled by market turbulence and
slowing global growth -- have said they would be patient before
moving rates up again, meaning they'll pause after a series of rate
increases last year and before.
The Bank of Canada has also made a notable about-face. In early
December, the Canadian central bank pointed to a
weaker-than-anticipated housing market and the rapid decline in oil
prices in signaling a pause in rate rises.
"We have to do our work in order to understand the shock better
and what its magnitude actually is," Governor Stephen Poloz said
last month. "We need some time."
ECB President Mario Draghi is expected to acknowledge the
darkening outlook after the bank's policy meeting Thursday.
Speaking at the European Parliament in Strasbourg earlier this
month, Mr. Draghi admitted that recent data had been weaker than
expected, although he argued that the eurozone probably would avoid
recession.
"At least for some time to come, there's going to be a
continuing uncertainty that changes nature, and this has a cost.
And the cost is lower confidence -- lower business confidence and
lower consumer confidence," Mr. Draghi said.
JP Morgan projects a first rate rise in December, rather than
September, and sees fewer subsequent moves.
The eurozone economy enjoyed its fastest growth in a decade
during 2017, a 2.4% expansion that ECB's economists expected to see
continue through 2018. The World Bank now estimates growth slowed
to 1.9% last year and will slip further to 1.6% this year.
Much of the turnaround is due to weaker demand for eurozone
exports. There are problems closer to home as well. Holdups at
Germany's key automobile factories pushed Europe's largest economy
to the brink of recession in the final six months of last year.
Italy may not have avoided that fate, following a jump in borrowing
costs as investors fretted over the government's plans to add to an
already large debt load.
In France, President Emmanuel Macron is wrestling with rolling
mass protests aimed at derailing his economic reform plans. And the
U.K.'s Parliament is deeply divided over how to manage the
country's planned divorce from the European Union, barely two
months before it is due to depart.
The composite Purchasing Managers Index for the region -- which
measures manufacturing and services activity -- fell to its lowest
level in more than four years in December.
The firm that compiles that measure -- IHS Markit -- has built a
model that assesses the probability of a policy move based on the
past relationship between the indicator and policy changes: it
suggests the probability of a rate rise is just 7.7%, and a rate
cut is more likely.
Europe's economic prospects could brighten. A trade deal between
the U.S. and China could revive growth, and a smooth Brexit would
help. Unemployment has fallen below 8%, its lowest level in more
than a decade, and wages are rising relatively briskly.
However, that hasn't yet triggered a sustainable rise in
inflation toward the ECB's target of just below 2%. Figures
released Thursday show the core inflation rate -- which excludes
volatile prices such as those charged for energy and food -- was
unchanged at 1% in December.
ECB officials are mindful of the bank's past tendency to raise
interest rates at the wrong time. It increased key rates in 2008
and then again in 2011. In both cases those moves were followed by
recession.
If Europe is indeed headed toward a new downturn, policy makers
would be in an uncomfortable position. The ECB has little room to
cut interest rates further or to buy more government bonds.
"The uncomfortable truth is that there may not be a whole lot
the ECB can do to offset a moderate slowdown," said Mr. Wells.
Write to Tom Fairless at tom.fairless@wsj.com and Paul Hannon at
paul.hannon@wsj.com
(END) Dow Jones Newswires
January 19, 2019 08:14 ET (13:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.