Yesterday's European Central Bank's (ECB) Governing Council meeting would have been a big ho-hum were it not for some minor, albeit significant, tweaks in the bank's outlook.
As expected, the ECB left interest rates unchanged - the benchmark refinancing rate at 0%, the marginal lending facility rate at 0.25% and the deposit facility rate at -0.4% - while at the same time reiterating the reduction of its monthly asset purchases from the current €30 billion (until the end of this month) to €15 billion from October to December 2018, and will then end.
The ECB staff macroeconomic projections "foresee annual real GDP increasing by 2% in 2018, 1.8% in 2019 and 1.7% in 2020. Since the ECB's last outing in July, the Eurozone's economic growth has slowed to 2.1% in the June quarter from 2.4% in the March quarter."
However, ECB President Mario Draghi has already pencilled this in. In his July Q&A, Draghi admitted that growth has moderated in the first quarter (and even continuing in the second quarter) but quipped that this was moderation from the "unusually strong growth" of the last three quarters of 2017. Even so, "all indicators have now stabilised at levels that are above historical averages."
The slight downgrade to GDP growth - relative to the June quarter projections of 2.1% for 2018 and 1.9% in 2019 (2020 is unchanged at 1.7%) - is "mainly due to a somewhat weaker contribution from foreign demand."
"Certainly the major source of uncertainty that we see in global output comes from the rising protectionism. That is the major source of uncertainty which, by the way, is reflected in the current macroeconomic projections only to the extent of the measures that have been implemented already."
But while the ECB sees the risks to the outlook still broadly balanced:
"The current projections do not reflect measures that have been announced, measures that have been threatened. Clearly, there we have to look at basically three factors that may make this uncertainty more severe. One is clearly, we have to see, we have to assess the extent of an escalation; that is one factor that certainly we have to look at. The so-called confidence effects; besides the effects on prices and tariffs and quotas and volumes, trade and so on, what is going to be the effect on general confidence of an extended trade war? That is certainly a second factor. The third factor which makes any assessment quite difficult is to assess; what are the implications on the international value chain of changes in tariffs of a broad and significant proportion."
It seems that these downside risks are responsible for the ECB to keep its inflation forecasts unchanged at 1.7% in 2018, 2019 and 2020 despite the latest HICP inflation reading of 2% in August.
Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.