ECB inches toward start of rate hikes

The ECB is inching closer to a time when it will end its huge bond-buying programme of pumping money into the financial system, which will signal the start of hikes in interest rates for the first time since the crisis, writes Eamon Quinn

After a key meeting in Frankfurt, central bank head Mario Draghi said the eurozone’s economic turnaround gave the ECB the confidence to tone down its bond-buying pledge, though he also warned against rising trade protectionism and financial deregulation.

At the same time, he reiterated that quantitative easing (QE), scheduled to run at a monthly pace of €30bn until at least the end of September, will continue until eurozone inflation is solidly back on track toward the goal of just under 2%. After an initial jump, the euro fell 0.4% against the dollar. Against sterling, it slipped to 89.1 pence.

His comments led to a warning by trade group Brokers Ireland for mortgage holders to prepare for the inevitable rise in interest rates, in the next few years.

Director Rachel McGovern said Irish interest rates were already much higher than the rest of the eurozone. “In the case of excessive Irish interest rates, for mortgage holders and businesses, if we cannot get closer to the European norm before the ECB changes the cycle to an upward curve it is highly unlikely it will happen afterwards,” she said. “In fact, there is a real risk that the differential could worsen as the rate increases.” she warned.

Timothy Graf at State Street said the ECB is being influenced by the performance of the eurozone economy, but a definitive end to QE still has to come. “However, any shifts in language to ending its asset purchase programme will have to wait, thanks to the currently benign inflation conditions throughout the eurozone and the recent strength of the euro.” He added: “Recent economic strength has been sufficient to allow the ECB to drop its pledge to increase the size and duration of QE if required. While their near-term growth forecast was revised up, there was a minor downward revision to the inflation forecast. The ECB is growing in confidence that above-trend growth will continue.” State Street said that the ECB may “still be trying to stem off a too rapid appreciation of the euro, which makes the inflation target more challenging”.

- Additional reporting Bloomberg

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