ECB to raise rates despite Italy clash
The ECB won’t be deflected by the Italian political and budget drama and will raise interest rates next year, a economics firm has predicted.
Capital Economics said that as long as the eurozone keeps growing the ECB will not delay the ending of its cheap money policy of bond buying known as quantitative easing because as yet there are “no signs that Italy is derailing the eurozone economy”.
“As long as the eurozone economy keeps growing and wage growth is rising, the ECB is likely to stick to its plan to end quantitative easing this year and start raising interest rates in late 2019,” the firm said.
Italy’s recently elected populist government has clashed with the European Commission over its spending plans in its first budget.
Rome says it wants to spend more to boost growth but the showdown has sparked a selloff in Italian government bonds and sent the cost of borrowing soaring for the heavily indebted state. Italian banks shares have also slumped. Capital Economics said Italian banks own about 20% of all Italian government bonds, “and in the event of a string of downgrades those bonds would no longer be eligible as collateral for ECB loans”.
Former Irish Central Bank governor Patrick Honohan said the ECB’s plan to stop expanding quantitative easing after this year could put Italy in a weak spot. “When this support is removed, the yield on Italian government bonds will be much more vulnerable,” he said in London.
Capital Economics said if a serious crisis were to bite that the ECB would likely act. “If there were an existential crisis for the eurozone, we suspect the ECB would throw those rules to the wind and do whatever it could to bring that crisis under control,” it said.
