ECB Becomes More Bearish About Eurozone Growth And Inflation

Whilst the darkest days of the Global Financial Crisis are behind us; the European Sovereign debt crisis has been defused and fears of an imminent “Grexit” have subsided, the Eurozone economy is hardly enjoying the economic, sunny uplands. Uncertainty over Greece’s future has been a drag on the Euro and no sooner had that abated than concerns over the slowing behemoth of the Chinese economy sent currency investors scampering for the perceived safe haven of the Japanese Yen, putting more pressure on the Euro, alongside the Dollar and Sterling.

Whilst there is continual talk about the timing of an interest rate rise in the UK (end of the year?) and the USA (this month, perhaps, but probably not) there is no expectation that the European Central Bank will increase its rates in the foreseeable future. Indeed, Mario Draghi, president of the ECB has trimmed the bank’s forecast for growth for the next year and this. The ECB expects Eurozone growth to come in below forecast for this year at 1.4% rather than the anticipated 1.5%. It now thinks that growth in 2016 and 2017 will be 1.7% next year, 0.2% below a previous forecast.

On the positive side of the balance sheet, inflation is likely to remain weak (below target, but that won’t worry consumers who will see purchasing power increased a tad) for some years: “Lower commodity prices, a stronger euro, somewhat lower growth, have increased the risk to a sustainable path of inflation towards 2%,” he told a news conference in Frankfurt, last week. The bank has also cautioned that inflation could become negative for a while, again. It anticipates that full-year inflation in the Eurozone will be 0.1% this year, but ought to rise to 1.5% next year. The ECB target an inflation figure of 2%.

Unsurprisingly, the ECB has decided to leave interest rates on hold at 0.05%. The asset purchase program that is slated to end this time next year could be continued, if necessary. The monthly investment program, worth €60 billion, was intended to boost liquidity in the bloc and also stoke a little inflation.