14 June 2018
The announcement that QE would be reduced to €15 billion per month in the fourth quarter, before ending in December, was more or less expected. The surprise was that ECB Governor Mario Draghi forcefully pre-committed not to hike rates until September 2019 at the earliest (keeping rates unchanged ‘through the summer, at least’).
This is remarkable for a couple of reasons. First, the ECB now forecasts inflation at 1.7 per cent in all of 2018, 2019 and 2020. To most, this would seem to qualify as meeting their target of ‘close to, but below, 2 per cent’. Second, extrapolating the steady fall in unemployment the Eurozone has now enjoyed for many years, the unemployment rate will be back at 2007’s low levels by the time the ECB hikes for the first time this cycle - ‘at least’.
Draghi also sounded markedly negative on economic developments, emphasising risks, uncertainty, and financial market volatility. He even said that the ECB’s latest forecasts, which show continued above-trend growth, were made prior to some incremental negative information being received. The slowing in Eurozone data at the start of this year is clear, but this feels like an overreaction from a central bank that we would expect to remain a steady hand with a medium-term outlook.
The markets’ knee-jerk response was to sell the Euro - this could extend further. Not only does the Eurozone have to contend with an economy that has peaked and is underperforming the US, medium-term geopolitical concerns, and higher oil prices - but now it may not see positive interest rates before the next global downturn, and enter that downturn with very little monetary policy ammunition.
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.
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