ECB worried, but holds its course

The ECB therefore keeps interest rates at 0% and also maintains its intention to increase them at the earliest in the autumn of 2019. At least, if developments on the inflation front proceed as the bank now expects. In about 2 weeks, the ECB will stop buying government and corporate bonds, or the bank will stop quantitative easing. 

Although, stops is a strong word. The bank will continue to use the proceeds from previous purchases, the interest and repayments to buy new bonds. That will the ECB continue to do so even after the official interest rate increase. In general, the bank says it will pursue an accommodative monetary policy until annual inflation in the euro zone is structurally and sustainably below (but close to) 2% per year.

Inflation forecasts
The new inflation expectations for 2018, 2019 and 2020 from ECB economists were therefore important. This year, according to economists, inflation will be slightly higher than previously expected. Although that is not surprising, because it is a logical consequence of the fact that inflation was recently higher than expected.

Inflation in recent months was higher than the ECB expected, which was due to the increased oil price. Black gold has become considerably cheaper in recent weeks, which is reflected in the 2019 estimate; which has been reduced from 1,7% to 1,6%. The estimate for 2020 has remained the same at 1,7%. Economists predict that prices in the eurozone will rise by 2021% in 1,8.

If that expectation comes true, it is obvious that the ECB's monetary policy will remain accommodative in 2020 and 2021. At most 3 interest rate increases are also expected. An inflation rate of 1,8% is slightly too low for the ECB, but is based on the assumption that policy will remain accommodative. If the bank tightens policy somewhat, there is a good chance that inflation will be lower in 2021. And the bank wants to prevent that.

If reality turns out to be less favorable, the bank is ready to roll out the purchase of government and corporate bonds again. Mario Draghi, President of the ECB, once again underlined that this instrument has become a standard tool for the ECB. That is why the European Court of Justice recently ruled that the ECB is not exceeding its mandate by using this instrument. 

Interest rates will remain very low for a long time
For residents of the eurozone, the above will mean that interest rates will remain very low for a long time to come. You can think of the savings interest, but also the mortgage interest. These will rise if the ECB becomes less active on the capital market and economic growth remains high. However, levels before the last crisis seem unlikely in the near future.

Equities investors can also rely on the ECB, just as the Fed, will not do anything that could endanger financial stability (i.e. push down stock prices).

Adjusted growth estimates
In recent weeks, many institutions (including the OECD) have lowered their growth estimates for 2019. Germany's economy shrank in the third quarter and there are further indications that growth is slowing. Draghi acknowledged that when he said that downside risks appear to be increasing, examples include the threat of protectionism, vulnerable emerging markets and increased volatility in the financial markets. 

However, lower growth does not immediately mean low growth, Draghi rightly said. After the previous historic 'whatever it takes', it seemed as if he now said a justified 'whatever' to the economists and analysts who see a significant decline in growth, a recession or a resurgence of the euro crisis in 2019. It should not be forgotten that the economic situation in 2019 could actually surprise on the positive side.

If China and the United States (US) do not escalate their trade war, the damage caused by protectionism may not be as bad. Various trade agreements are also being concluded. Volatility in the markets may be better than expected due to the fact that the Fed appears to be raising rates less often than it previously said.

And with regard to emerging markets; With the ECB keeping its rate unchanged and in the knowledge that the Fed will raise interest rates less often next year, 2019 could easily be a year in which the euro gains ground against the dollar. A rising euro-dollar exchange rate would improve the economic prospects for emerging countries, thereby increasing prospects for global economic growth. The lower oil price can best be seen as a kind of tax cut, which may increase consumption slightly.

No change in course
The ECB is therefore not changing its course and the main reason for this is that 'inflationary pressure' is building up beneath the surface. Thanks to the decline in unemployment and high economic growth, wages are rising faster than in the recent past. This means that companies have to deal with higher labor costs, which they pass on to the end customer. This appears to be structural and the ECB has been waiting for this for years. 

Thanks to the loose monetary policy and expected economic growth, the ECB sees this underlying pressure increasing. That is why it would not surprise me if the ECB raises the official interest rate in 2019 and who knows, even in the summer of that year. That being said; After that, interest rate increases are unlikely, which in concrete terms means that the EURIBOR will remain very low for a long time. 

High economic growth, underlying inflation and the expected deepening of the eurozone indicate that the German 10-year interest rate could rise to 2019% in the course of 1. A steepening of the yield curve could therefore easily happen in 2019.