Published: Fri, April 27, 2018
Finance | By Gustavo Carr

ECB's Draghi warns over eurozone slowdown, trade war risk

ECB's Draghi warns over eurozone slowdown, trade war risk

The take away from the latest ECB monetary policy meeting and press conference is that nothing has changed from the last meeting and that ECB President Mario Draghi is content to let the Euro drift lower, hoping to import inflation.

The eurozone economy turned in a robust 2017 performance, with annual growth hitting 2.5 percent, the best in a decade.

Reuters reported on Monday that the ECB was considering shelving planned rules that would have forced banks to set aside more money against their stock of bad loans, after criticism from lawmakers, bankers and even from within the institution.

In particular, policymakers will need to agree an end-date for the ECB's 2.55 trillion euro ($3.10 trillion) bond purchase program, which has cut borrowing costs and kick-started growth, even if it has failed to lift inflation back to target.

But with the risk of a global trade war still looming, it may not decide until absolutely necessary, so retaining the flexibility to adjust policy. It is up around 1.5 percent against the US dollar so far this year and was trading at $1.2155 shortly after 1 p.m. London time.

A sharp sell-off in bonds over the last week has been pushing up global borrowing costs, meaning there is more focus than ever on when the European Central Bank ends its 2.55 trillion euro ($3.2 trillion), three-year stimulus programme.

Looking to indicators of economic activity such as industrial production or business confidence, Draghi acknowledged that "declines were sharp" in recent weeks across countries and economic sectors, hinting at "some moderation" in growth.

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The ECB governing council at its meeting today decided that the interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and (-) 0.40 per cent respectively.

Draghi said that some causes could be temporary, such as weather, strikes or calendar effects like the timing of Easter. The bank suggested that rates would remain lower for a while after quantitative easing ended.

Economists polled by Reuters ahead of the meeting expected bond purchases to end this year after a short taper and to see the first rate increase in the second quarter of 2019.

A major concern for the European Central Bank is that nationalist rhetoric from the USA could decrease the value of the dollar, despite the Federal Reserve gearing up to raise interest rates several times in 2018.

The impact of the euro's strength has been relatively limited so far, however.

This confident message sent the EUR/USD to the highs of the day below $1.2200, but markets remain cautious.

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