Why 2019 Could Be An Inflection Point For The ECB

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.

(Click on image to enlarge)

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.

1 2
View single page >> |

Disclaimer: The information found on forex.info are intended only to be educational, is not advice nor a recommendation and thus should not be treated as such. We strongly recommend that you ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.