Draghi Is Pressing Ahead With Rate Hike in 2019 Despite Risks

(Bloomberg) -- Mario Draghi will only just manage to raise the European Central Bank’s interest rates before his term as president ends in October 2019 amid continued risks from U.S. tariffs and Italian politics, according to a Bloomberg survey of economists.

With asset purchases about to conclude in December, most respondents predict euro zone policy makers will increase the deposit rate by September next year, to minus 0.2 percent from minus 0.4 percent.

Draghi Is Pressing Ahead With Rate Hike in 2019 Despite Risks

That’s earlier than market pricing for a hike of similar magnitude in the first quarter of 2020, though the economists acknowledge the challenges ahead. They see the biggest risks as trade protectionism and the possibility that Italy’s populist government, planning a high-spending budget that could increase the nation’s debt load, will precipitate a financial crisis.

“There remain a lot of bridges -- both economic and geopolitical -- to be crossed before the ECB can feel totally happy about raising interest rates,” said Alan McQuaid, chief economist at Merrion Capital Group Ltd. There is “every chance” Draghi will end his term without having overseen a rate increase.

Draghi Is Pressing Ahead With Rate Hike in 2019 Despite Risks

No change in monetary policy or forward guidance is expected on Thursday, when Governing Council members will meet for the first time since their summer break. Instead, officials are set to confirm their plan to start slowing bond purchases in October, to cap the program by the end of the year, and to keep rates on hold at least through the summer of 2019.

While euro area growth clocked in at 0.4 percent for the second consecutive quarter, the ECB’s staff will be updating their forecasts against a backdrop of moderating momentum and still-subdued inflation pressures. A spate of data this week showed global trade tensions were beginning to filter through into manufacturing performance, with German orders falling for a sixth month this year.

Further pain could be in store, with U.S. President Donald Trump signaling in a Bloomberg interview last week that the truce on tariffs he struck with the European Union might not last.

“The greatest risk remains linked to the commercial tensions triggered by America,” said Attilio Bertini, head of research at Credito Valtellinese, adding that he assigns a probability of no more than 30 percent to the conflict escalating into a full-fledged global trade war.

What Our Economists Say...
“The ECB’s biggest challenge at the next meeting will be to communicate that its monetary policy intentions remain the same as in June, even after a deceleration in GDP growth and inflation. President Mario Draghi is likely to play down the impact of trade wars and the turmoil in Italy, while acknowledging the risks they pose.”

--David Powell, Jamie Murray, Bloomberg Economics. To read more: EURO-AREA PREVIEW: ECB to Remain Optimistic in Face of Slowdown

Meanwhile, prospects that Italy’s budget plans may violate an EU deficit limit of 3 percent of economic output have kept investors on edge. The nation’s bond yields have spiraled to the highest levels since the euro-area debt crisis, before a draft due later this month.

Any changes to the ECB’s reinvestment policy will remain on the shelf, with some 17 percent of respondents expecting an adjustment by December and two fifths none at all. A majority predicts the ECB will continue to roll over maturing debt for two to three years after fresh purchases come to an end.

Draghi Is Pressing Ahead With Rate Hike in 2019 Despite Risks

If all goes according to plan, economists predict Draghi will provide more clarity about the exit path by April, including specifics on the timing of interest-rate hikes. According to the survey, the ECB will raise the main refinancing rate to 0.25 percent from zero percent in December next year.

©2018 Bloomberg L.P.