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ECB Holds Interest Rates Steady as Euro Zone Growth Slows

Published 01/24/2019, 07:46 AM
Updated 01/24/2019, 07:46 AM
© Reuters. - The European Central Bank left interest rates on hold as expected Thursday, as a sharp slowdown in euro area growth fueled expectations that any policy normalization could be delayed.

Last month, the ECB ended its four-year long €2.6 trillion ($2.96 trillion) bond purchase plan and reiterated that interest rates are likely to remain on hold at least through the end of summer.

But growth now appears weaker than thought just a few weeks ago. Data earlier in the day showed that business activity across the bloc barely expanded at the start of the year as a fall in new work pushed activity to a low not seen since the middle of 2013.

Similar surveys showed activity remained lackluster in Germany during January and contracted in France for a second month.

Economic weakness in the euro zone, coupled with growing concerns over the negative impact of the trade war between the U.S. and China, have caused economists to push back their expectations for the ECB's first interest rate hike of the cycle.

“While an outright recession will probably be avoided this year, a sharper-than-expected slowdown in the U.S. or further escalation of the (U.S.-China) trade war may be enough to cause a mild recession,” Andrew Kenningham, chief euro zone economist at Capital Economics, warned.

In the midst of slowing growth, trade worries and lingering uncertainty regarding the U.K.’s separation from the European Union, economists don’t expect the ECB to raise its deposit rate until the fourth quarter. They think it will wait until early 2020 to raise its refinancing rate from zero.

“With the recent loss of growth momentum and increased downside risks to the growth outlook, stemming from trade, China and Brexit, the risk of the ECB sleepwalking into the next crisis has increased,” Carsten Brzeski, ING’s chief economist in Germany said. “For the time being, however, being a cool dude who is on high alert rather than panicking into impulsive action seems to be the right strategy.”

-- Reuters contributed to this report

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So Drago stopped QE, hmmm. How do you suppresses interest rates without QE?
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