ECB Has Narrow Window for Rate Hikes Before Economy Too Soft

(Bloomberg) -- The European Central Bank will only have a narrow window to raise interest rates before the euro-area economy becomes too weak, according to a Bloomberg survey of economists.

Mario Draghi is seen lifting the deposit rate at his final meeting as president in October, but his successor will only have until spring of 2020 to tighten policy before soft economic growth requires a lengthy pause.

ECB Has Narrow Window for Rate Hikes Before Economy Too Soft

“If they see a good opportunity they will move but that’s obviously under the assumption there will be a recovery in growth,” said Elwin de Groot, senior market economist at Rabobank in Utrecht, Netherlands. “By the end of 2020 we may actually be facing more difficult circumstances.”

Economists and investors have pushed back their expectations for higher rates after a string of disappointing data. That meshes with global concerns that geopolitical disputes are hurting growth.

The survey shows a loss in euro-area momentum, trade tensions and a disorderly Brexit as the biggest threats. Draghi told the European Parliament on Tuesday that the region isn’t headed for a recession, though the current slowdown could last longer than expected. The Governing Council will meet to set policy on Jan. 24.

ECB Has Narrow Window for Rate Hikes Before Economy Too Soft

The weakness is reflected in the euro, which is down 0.5 percent against the dollar and 2 percent against the pound this month.

Still, some officials have warned against excessive pessimism. Executive Board members Yves Mersch and Sabine Lautenschlaeger as well as Estonia’s Ardo Hansson argued the economy is broadly evolving as projected.

Almost two-thirds of respondents in the survey said the ECB will reiterate that risks to the economic outlook are still broadly balanced.

“It wouldn’t be wrong to describe risks as tilted to the downside but this could be understood by market participants as a need to ease policy further,” said Kristian Toedtmann, an economist at Dekabank in Frankfurt. “It probably couldn’t deliver upon such expectations.”

ECB Has Narrow Window for Rate Hikes Before Economy Too Soft

In an effort to assuage concerns about a premature tightening of financial conditions, the ECB is widely seen offering new long-term loans to banks, before existing ones expire in June 2020.

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When officials decided late last year to stop expanding their 2.6 trillion euro ($3 trillion) bond-buying program, a suggestion was already made to “revisit the contribution” the previous round made to the policy stance. Most respondents predict an announcement by March and an allotment three months later.

ECB Has Narrow Window for Rate Hikes Before Economy Too Soft

“The really interesting question is how bad things really are,” said Andrew Kenningham, chief European economist at Capital Economics in London. “Clearly, they’re not fine and are not heading in the direction that the Governing Council had hoped. But what we really don’t know is if it’s just a gentle softening and we’re going to pick up again.”

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