European Central Bank meeting: Quantitative easing is coming to an end but low rates likely to persist - J.P. Morgan Asset Management

European Central Bank meeting: Quantitative easing is coming to an end but low rates likely to persist

Contributors Jai Malhi, Global Markets Insights Strategy Team

Today the European Central Bank (ECB), at its final monetary policy meeting of the year, confirmed that it will cease net asset purchases at the end of this year, in line with its previous guidance. The ECB kept its key interest rates unchanged and also kept the forward guidance on its deposit rate the same. They also produced new macro-economic projections that include forecasts for 2021.

President Mario Draghi had previously stated that the central bank’s key interest rates would stay at their present levels “at least through the summer of 2019”. There was no change to this forward guidance on rates but he did acknowledge some of the risks to growth. These downside risks could postpone the move away from negative rates. While we are seeing the end of new net purchases, the ECB will reinvest its maturing bonds for an extended period of time beyond the date when it starts to raise interest rates.

EXHIBIT 1: European Central Bank staff macroeconomic projections for the euro area

Source: European Central Bank, J.P. Morgan Asset Management. Data as of 13 December 2018

While Draghi highlighted some risks to the growth outlook he remained positive on the strength in domestic demand and was constructive on the inflation outlook. Eurozone wage growth of 2.5% year on year – the highest since 2008 – caused the ECB to remain confident that core inflation will rise. Although, headline inflation is expected to be below target over the next few years the strength in wage growth means they expect both headline and core inflation to converge towards target and reach 1.8% by 2021.

The latest forecasts produced show a small downgrade to real GDP growth for 2018 and 2019 by 0.1% and for growth to slow towards 1.5% by 2021. The ECB has continued to describe the European economic expansion as being supported by the strength of the domestic economy. However, the balance of risks is moving to the downside, primarily due to increased geopolitical uncertainty and weaker economic data.

If the weakness in economic momentum and external demand persists, the ECB may be forced to keep rates on hold beyond next summer. In which case, negative interest rates will continue to pose a challenge for the profitability of Europe’s banks for some time yet.


Related Solutions

J.P. Morgan Global Liquidity
Today’s complexities require a dedicated liquidity partner committed to helping clients succeed through all market cycles.
Performance & Yields
J.P. Morgan delivers comprehensive solutions based on the unique investment objectives of your organization.
Liquidity Insights
View original research, reports and commentary from our portfolio managers, analysts, economists, and traders.

Important information

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields is not a reliable indicator of current and future results.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority, Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.