Eurozone GDP growth and inflation expectations cut

EU-Europe-Flags-Euro-700x450.jpgThe European Central Bank has cut its expectations for eurozone inflation and GDP growth, as it announced further monetary policy measures to boost the eurozone recovery.

Speaking after the announcement of a further interest rate cut and a €20bn extension to quantitative easing, as reported, Mario Draghi said forward expectations of growth had been cut as a result of global growth concerns.

Expectations for annual real GDP growth have been cut to 1.4 per cent for this year, down from 1.7 per cent previously. The expectations for GDP growth for 2017 are unchanged at 1.7 per cent and 1.8 per cent for 2018.

Inflation expectations for this year have been slashed, with annual inflation expectations for this year cut from 1 per cent to 0.1 per cent. The cut for 2017 is more muted, with inflation expected to hit 1.3 per cent, down from the 1.7 per cent expected previously.

As part of the moves announced today the ECB cut the deposit facility rate by 10 basis points to -0.4 per cent.

Draghi says the move to negative rates has been successful and he did not rule out further rate cuts.

“Rates will stay low and very low for a long period of time. From today’s perspective and taking into account the support of measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further. Of course new facts can change the situation and the outlook,” says Draghi.

“The experience we have had with negative rates has been very positive in easing financial conditions and in the transmission of the better financial condition to the real economy. Does it mean that any negative rate will be possible? Does it mean we can go as negative we want without having any consequences on the banking system? The answer is no.”

Ahead of the rate decision, some commentators had expected a tiering system to be implemented in a rate cut, excluding some from the negative rates.

However, Draghi said the governing council decided not to implement such a system in order to not signal that they could go as a low as they want.

“The governing council is increasingly aware of the complexities this measure entails,” he adds.

Markets reacted well initially to the announcement.

“This makes for a much more dramatic package than had been expected and Draghi got what he wanted. Share prices rose, as benchmarked by the Stoxx Europe 600, bond yields fell across the peripheral south and the euro fell sharply against the dollar from $1.0999 to $1.0869,” says Russ Mould, investment director at AJ Bell.

“The key now, however, is whether the moves have any sustained benefit, as even with markedly lower bond yields and weaker currency after 12 months of QE, the eurozone’s economy is still struggling for traction, while financial markets remain torn between their faith in central banks’ ability to fuel an inflationary recovery and their fears of a deflationary downturn.”

However, following the announcement some remain unconvinced that monetary policy alone can boost European growth.

“Whilst we believe that at the margin this will help financial assets, it is anaemic demand for credit rather than the cost of supply that appears to be the fundamental issue and this is creating the low inflation environment in Europe. We hope these measures can boost confidence, but doubt whether monetary policy alone can kick start the broader European economy,” says Ian Tabberer, global equity investment manager at Henderson Global Investors.

Stefan Isaacs, deputy head of retail fixed interest at M&G, agrees that more needs to be done to convince markets.

“Yes the ECB can likely drive risk-free rates even lower. Yes they can depreciate the euro, and yes they can provide ever more liquidity to the banking system. These may all help near term, but without real reform the market will increasingly worry that we have reached the limits of monetary policy. And at some point if the market cannot be convinced otherwise, then the consequences will be significant,” he says.

Markets have rallied following the announcement, but some think this may not last.

“There has been a clear loss of momentum in Europe’s recovery, in addition political risk remains a concern for the region. With valuations above their long term averages we favour defensive investments in the region and believe any rally following today’s announcements might be short lived,” says Adrian Lowcock, head of Investing at AXA Self Investor.