The European Central Bank has for a long time downplayed the upcoming economic slowdown, claiming that it will be short-lived and shallow. As a result of this approach, the European Central Bank has already completed the QE program, and also announced that the first interest rate hike may take place at the end of the summer of this year.
Reality, however, turned out to be more pessimistic than the ECB assumed, and the slowdown is deeper and lasts longer than originally thought. As a result of weaker macroeconomic data from the eurozone and Germany, economic forecasts are systematically reduced. This means that the ECB can re-review its view of when interest rates can be raised. Recently, the new possible date announced by the central bank is at the beginning of next year, but there are already voices saying that interest rate hike may take place much later.
Olli Rehn, governor of the Bank of Finland sitting on the Governing Council of the European Central Bank, said that some members of the ECB Governing Council think that keeping interest rates at the current low levels into next year could be warranted. Olli Rehn added that after the ECB decided to keep interest rates unchanged until the end of 2019, some of us were of the opinion that the low rates stance could even have continued a little longer.
The big question at the moment is whether the European economy is experiencing a short and temporary phase of slower growth, which will soon be over driven by a recovery in the global economy, or whether it’s headed for a longer phase of slow growth, which would require a clearly more accommodating economic policy - Rehn said.
At ECB’s meeting in Lithuania June 5 we will know a little more about whether the uncertainties have started to intensify or ease and are prepared to take the decisions that are necessary - Rehn added.
The ECB, unlike the FED, has the problem that in the meantime it has not managed to normalize monetary policy and raise interest rates in order to be able to lower them during the economic slowdown. FED has such a possibility, and the ECB has to consider what to do next in the case of the black scenario.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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