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The European Central Bank (ECB) has downgraded its assessment of domestic economic situation, which has implications for global growth and monetary policy normalisation.\u00a0The regulator came up with its troika of announcements \u2013\u2013 slower growth, enhanced liquidity measures and extended low interest rate environment — sounding similar to the stance taken during the European debt crisis.<\/p>\n
ECB announcements Given this backdrop, ECB expects to keep policy rates at current levels through 2019-end<\/strong>. \u00a0In fact, it would keep it at lower levels till the time inflation is close to\u00a0two percent on a sustained basis. Currently, euro area Harmonised Index of Consumer Prices (HICP) inflation is 1.5 percent, which is expected to decline further later this year taking cues from the price of crude oil futures.\u00a0It expects inflation to clock 1.2 percent and 1.5 percent in in 2019 and 2020, respectively.<\/p>\n Ensuring that liquidity is sufficient, ECB enumerated that it is fully re-investing principal payments from the asset purchase programme till the time it starts raising interest rate. It has launched a new series of targeted longer-term refinancing operations (TLTRO-III), which would help in bank lending conditions and smooth transmission of monetary policy. To simplify it, this is lending to the banking system and is focused on stimulating further lending to end-customers.<\/p>\n Market reaction: Having said that, there are few positive signals in terms of favourable labour market dynamics and rising wage growth. Unlike the US Federal Reserve, the ECB continues to maintain a larger balance sheet, which is around 42 -43\u00a0percent\u00a0of eurozone GDP.<\/p>\n In our view, ECB has emerged as a key risk factor to monitor for a considerable period of time. A good part of the euro area risk pertains to external slowdown. Interestingly, the euro area has a higher share of exports (28 percent of GDP) compared to the US (12 percent of GDP) and China (20 percent).\u00a0Share of the euro area in global exports is 15.6 percent.<\/p>\n In the domestic market, there are few sectors and countries to watch for such as Italy and the automobile industry in Germany. In case of the latter, while there were some transient domestic factors such as implementation of tougher vehicle emissions standards, slowdown in China and ongoing US-China trade war is adversely impacting it.<\/p>\n Overall, we expect ample degree of monetary accommodation to continue for the foreseeable future.\u00a0This underlines the continued shift in global central banks stance, which is in contrast to what was visible a year back. Hence, we anticipate a downward bias for the euro in the near term.<\/p>\n Follow @anubhavsays<\/span><\/a><\/span><\/strong><\/em><\/p>\n For more research articles, visit our\u00a0Moneycontrol Research page<\/a><\/em>
<\/strong>On March 7, ECB downgraded\u00a0its 2019 GDP growth outlook for the eurozone area to 1.1 percent from 1.7 percent assessed\u00a0at its December policy meet. A downward shift in outlook was partly anticipated, given the weak macro numbers from individual countries \u2013 particularly Germany. In data released in February, Germany managed a flat growth in Q4 CY18, after contraction in Q3, and has barely been able to save itself from a technical recession.<\/p>\n
<\/strong>A significant change in growth expectations draws concerns for market participants. While the market anticipated downward revision, this was more-than-anticipated and earlier-than-expected. European and US indices were down 0.5 percent to one percent on March 7. German bond yields have dipped to levels last seen in 2016 and the dollar-euro has weakened.Takeaways:
<\/strong>There is a sizeable moderation in euro area economic momentum, which is expected to extend in the current year. As per ECB, risks to euro area growth outlook remains\u00a0on the downside. On account of geopolitical factors such as Brexit, US-China trade war and the slowdown in China, further downward revision is possible later this year.<\/p>\n
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