ECB slashes eurozone growth forecasts, interest rates to remain unchanged in 2019

The European Central Bank (ECB) slashed the eurozone’s economic growth forecast for 2019 from 1.7% to 1.1% on Thursday.

To counteract the bloc’s ailing economy, the ECB pledged to keep interest rates at record lows ‘at least through 2019’ and unveiled plans to launch a new round of stimulus.

‘For one of the first times in its short life, the ECB has been pre-emptive rather than reactive,’ Senior Global Investment Strategist at Principal Global Investors Seema Shah said.

‘By announcing new liquidity operations earlier than the market was anticipating, the ECB has moved ahead of the curve and provided strong reassurance to the banking sector - and to the real economy to some extent - that it will provide support if required.

‘Admittedly, these TLTROs [targeted longer-term refinancing operations] themselves are unlikely to provide strong stimulus but demonstrating its intent to act is half the job done,’ she said.

Eurozone bonds rally, sending yields lower after ECB meeting

The market anticipated the ECB to leave interest rates unchanged on Thursday, but investors were clearly surprised by the central bank’s decision to introduce a fresh round of stimulus, reflected by a eurozone bonds rallying, sending yields lower.

Italy’s yield on its short-term paper fell to its lowest level since May last year, sliding 14 basis points to 0.128%, while the longer-term German 10-year Bund fell 12 basis points to 2.492% on Thursday following the ECB’s meeting.

‘At this stage it is about as far as the ECB will go towards admitting that the European economy faces some serious headwinds in the months ahead,’ Aberdeen Standard Investments senior economist Paul Diggle said.

‘Markets are going to cheer the response with the euro selling off and bond yields and equity markets rallying,’ he added.

Euro loses ground against the dollar

The bank’s decision to downgrade its economic growth forecast for the eurozone also hurt the euro, with it falling by as much as 0.4% against the dollar to $1.1260.

‘Today’s monetary policy decisions were taken to ensure that inflation remains on a sustained path toward levels that are below, but close to, 2 percent over the medium term,’ ECB President Mario Draghi said after the policy meeting on Thursday.

’The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment.’