Euro rises after ECB’s Draghi raises hopes of 2019 interest rate hike

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14 September 2018

thomasdodds

The Euro rose by around half a percent to its strongest position against the US Dollar since the end of August on Thursday afternoon following the European Central Bank’s latest monetary policy announcement.

T
here were no massive surprises from the ECB. The Governing Council held policy steady with President Mario Draghi reiterating the bank’s plans to end its quantitative easing programme at the end of the year. Draghi did, however, strike a relatively upbeat tone over the state of the Euro-area economy and his press conference was, on the whole, pretty hawkish. He stated that the latest indicators confirmed ‘ongoing broad-based growth’. Importantly, he voiced greater optimism over the inflation outlook, stating that domestic cost pressures were strengthening and that uncertainty over inflation was receding.

As we reiterated recently, the ECB’s sole mandate is returning core inflation back to its ‘close to, but below’ 2% target level. Increased optimism among the Governing Council regarding a pick-up in price growth is therefore an important development, and makes us more convinced than before that the central bank will begin raising interest rates for the first time since 2011 at some point in 2019.

We think that Draghi’s comments today suggest that the central bank is on course to begin raising rates in either the second or third quarter of next year, provided core inflation shows concrete signs of approaching the bank’s target. There is a risk, of course, that this could be delayed somewhat until the final quarter of 2019 should the Eurozone’s core inflation measure continue to print comfortably short of target.

Bank of England votes unanimously to hold rates steady

Yesterday’s Bank of England monetary policy announcement was a little more low key, with the Pound little moved as a result. The bank held rates steady, as expected, with the minutes of the meeting effectively reiterating the message from the last meeting. Although, it did note that it expected inflation to ease next year due to an energy price cap. It continued to stress that an ongoing tightening of monetary policy remained appropriate, although that this would be limited and gradual.

We continue to think that the BoE will hikes rates again in roughly the second quarter of next year, although this is entirely dependent on a Brexit deal being struck. A report from The Times this morning quoted BoE Governor Mark Carney as saying that house prices could fall by as much as 35% over three years due to a ‘no deal’ Brexit.

Carney will be speaking again at around 11:00am this morning, with US retail sales to follow at around 13:30pm UK time.