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ECB’s Draghi Warns that Economic Risks are Moving to Downside, Euro Drops

Published 12/13/2018, 09:35 AM
© Reuters.

Investing.com - Despite the fact that the European Central Bank decided to pause on its asset purchase program, its president, Mario Draghi, warned that risks were leaning to the downside, sending the euro briefly to intraday lows.

Draghi commented that recent data had been “weaker than expected” as he announced that the outlook for economic growth was revised “slightly down” in 2018 and 2019 to 1.9% and 1.7%, respectively.

The ECB chief insisted that the risks surrounding the euro area growth outlook “can still be assessed as broadly balanced”.

“However, the balance of risks is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility,” he added.

The euro hit intraday lows as Draghi made the last comment with the single currency dropping to 1.1307 against the U.S. dollar and 0.8952 against the pound. At 9:34 AM ET, EUR/USD was at 1.1342, compared to 1.1375 ahead of the press conference, while EUR/GBP traded at 0.8970 compared to 0.8974 prior to Draghi’s appearance.

The ECB left interest rates at zero and also confirmed the end of additional increases to its €2.6 trillion ($2.96 trillion), four-year-long bond buying program on Thursday.

“Our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets, continues to provide the necessary degree of monetary accommodation for the sustained convergence of inflation to our aim,” Draghi stated.

While the ECB reiterated that rates would not budge until “at least through the summer of 2019”, some analysts have been suggesting that the euro zone central bank may not move until 2020.

“We now expect the ECB to hike interest rates in 2020 and not by late 2019 as currently communicated in the banks' forward guidance,” Fitch Ratings said on Wednesday. “We expect the ECB to change its forward guidance on interest rates in the next few months.”

“With the most prominent crisis-fighting measure of the ECB now almost back in the toolbox, the big question is, what will be next. More action, shelving of the next crisis-fighting measure negative deposit rates or nothing at all?” ING Germany chief economist Carsten Brzeski asked on Thursday.

“At least for now, the ECB’s forward guidance on rates, as well as the reinvestment, have been left unchanged. It seems as if the ECB wants to keep as many cards as possible close to its chest,” he explained.

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