What to expect from the ECB

Silvia Dall’Angelo, senior economist at Hermes Investment Management, tells IGTV that while this week’s European Central Bank decision is largely a non-event, the key risks for the eurozone economy right now still stem from Italy.

The European Central Bank (ECB) is widely expected to keep interest rates on hold at the Governing Council’s monetary policy meeting in Frankfurt on Thursday.

More important to investors will be the press conference that follows the decision, where ECB President Mario Draghi is likely to field questions on European monetary policy, Italy’s budget standoff with the European Union, the outlook for growth and inflation, as well as risks around ongoing global trade tensions.

While the ECB meeting this Thursday will be 'fairly uneventful', the main risk around this week’s meeting is 'probably more pertinent to what’s happening in Italy', Silvia Dall’Angelo, senior economist at Hermes Investment Management, tells IGTV.

From quantitative easing to quantitative tightening

The ECB is expected to put an end to its €2.6 trillion asset purchase programme in December, with tapering already in full swing.

In January, the central bank cut its bond buying stimulus in half to €30 billion per month and slashed its quantitative easing once again this October to €15 billion per month. However, the ECB has said previously that it will still keep rates low 'through the summer' of 2019.

Many analysts expect the ECB’s first rate hike since 2011 to come in autumn 2019. 'However, if things turn sour, they could delay, or signal a delay, in the first rate hike and signal a very shallow path for the policy rate after lift off,' says Dall’Angelo.

Disappointing inflation

Annual core inflation in the eurozone hit 0.9% in September, falling short of analysts’ expectations and sharply below the ECB’s target of 2%. The ECB is likely to acknowledge that inflation 'has been on the soft side', says Dall’Angelo.

However, 'forward looking indicators for inflation have remained quite solid', pointing to wages which she says are 'on a gradual rise' along with the unemployment rate which inched down to 8.1% in August marking the lowest jobless rate since November 2008. 'At this stage the ECB will maintain its confidence that inflation will converge towards its target in the medium term.'

The next ECB president

Draghi will end his term as ECB president in October 2019, raising questions about who will become his successor. Dall’Angelo tells IGTV the two current frontrunners are the former head of the Finnish central bank Erkki Liikanen and the Banque de France governor François Villeroy de Galhau.

However, she says 'the race is still wide open' and more clarity will be given next May after the European parliamentary elections and after the next European Commission president is announced.

European Central Bank meeting

Learn about the European Central Bank (ECB) Governing Council announcement – including how it affects the European economy and financial markets.

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