Mario Draghi, president of the European Central Bank (Photographer: Krisztian Bocsi/Bloomberg)

Mario Draghi Is Watching His ECB Rate Hike Slip Over the Horizon

(Bloomberg) -- The window for Mario Draghi to raise interest rates is about to slam shut.

The European Central Bank president, whose term ends in October, acknowledged on Thursday that the euro zone’s economic risks have moved to the downside. While he stuck to policy language that leaves room for a rate increase after the summer, investors and economists take a dimmer view, suggesting borrowing costs won’t rise until after -- perhaps well after -- Draghi leaves.

The ECB is showing it’s not immune to a broad cooling of monetary ardor as the global economy slows and the U.S. fuels protectionist sentiment. It may be forced to clarify its intentions as soon as the next decision in March, when it’ll update its forecasts for growth and inflation, despite Draghi insisting there’s still a chance of a “benign” outcome.

With the economy threatened by trade tensions, European politics and temporary factors such as a slump in German car production, “we’ll probably have to wait until the June meeting before the dust has settled,” said Carsten Brzeski, an economist at ING. “However, it will require a very benign outcome on all these risk factors to see Draghi hiking rates before he leaves office.”

UBS Group AG President Axel Weber, a former ECB policy maker and Bundesbank president, said at the World Economic Forum in Davos this week that the ECB has already missed its chance to normalize policy in this cycle.

What Our Economists Say...
“Risks to the outlook are now tilted to the downside. This confirms that the first rate hike is unlikely to come before December and that the ECB’s forecasts will be lowered in March.”

-- Maeva Cousin , David Powell and Jamie Murray, Bloomberg Economics. See their ECB REACT

Elsewhere, the U.S. Federal Reserve has signaled it could slow the pace of rate hikes this year, and the Bank of Japan lowered its inflation forecast on Wednesday. The People’s Bank of China is expected to further ease monetary policy in 2019 as the economy faces a deepening slowdown and trade conflict with the U.S.

Swiss National Bank President Thomas Jordan said in a Bloomberg Television interview from Davos that the spat between the U.S. and China will impact the global economy and that Swiss interest rates, already at a record low, can be reduced further if needed.

Still, Draghi played down talk of one potential support measure for the euro area -- a new round of long-term loans for banks -- saying there would have to be a monetary-policy case for such a move. He went out of his way to stress that the outlook for policy depends on how the economy develops.

“I can only interpret that as, if the economy picks up, then a rate hike is not off the table this year as markets are pricing,” said Piet Christiansen, a senior analyst at Danske Bank who’s predicting the first increase in December.

Investors didn’t change their ECB rate expectations from Wednesday. They have a 10 basis-point move priced in for June 2020 and 15 basis points for September 2020. Economists, who have been slower than market participants to push out their rate predictions, are becoming more bearish.

Thursday’s press conference was “a nail in the coffin of an early rise in interest rates,” said Joerg Kraemer, chief economist at Commerzbank AG. Draghi “did not oppose the markets, which -- like us -- do not expect interest rates to rise this year.”

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