While the US financial system faltered in 2008, the economy hit hard and the Fed cut interest rates to 0% to buy bonds, the European Central Bank was busy raising interest rates.
The crisis was an American problem and the chance that the European Union (EU) would become infected was small. I can still hear the then captain of the ECB (Jean Claude Trichet) say that clearly. I suspect that (in retrospect) that blunder still haunts the minds of the ECB board members.
Is the situation now comparable?
In 2019, the situation is to some extent similar. The Fed has significantly lowered its expectations for the number of rate hikes this year in recent months. This time it did the ECB that too. The ECB board discussed various topics on Thursday, January 24; They also wondered how long this situation will last. The European bank has decided to first analyze the situation carefully, after which it must be determined which way to go. Until then, the bank will not change its policy or plans.
There is a lot to be said for this choice. First of all, because the ECB stopped buying bonds a few weeks ago. It is now important to watch the economy and markets for a while to see how they respond to these changes. Depending on this, it must be determined whether new measures are desirable and necessary. The disappointing macroeconomic figures of recent weeks also have an influence. These can be a temporary phenomenon. Had the ECB responded immediately, the bank would have been irresponsible.
Panic football
If the ECB had started playing panic football, it could have worsened the situation. If the bank responds immediately and intervenes, then there may really be something wrong. At least, that's what the market might think. This could have resulted in a blow to investor confidence, a dip in consumption and in prices. The ECB, on the other hand, indicated that downside risks have increased. That is a change compared to December, when the bank stated that the risks were virtually balanced.
In addition, Mario Draghi, the president of the ECB, said that this adjustment to the description of the economic environment will have consequences for the bank's policy. However, next time. The next meeting is on March 7, 2019. In March, the board will also receive the new estimates for economic growth and inflation in 2019, 2020 and 2021. And these are very important figures. With these figures they can better estimate whether the planned policy is optimal or whether a recalibration is necessary. It is therefore too early to conclude that an interest rate increase should be completely off the table this year.
Crucial weeks
The coming weeks are crucial. If the flow of disappointing economic news continues, the trade war talks between the United States (US) and China yield no results, unemployment in the EU rises and wage increases level off, then there is a (very) good chance that interest rates will not only 2019 will remain the same, but also in 2020. However, if there are indications that the economy is rebounding, I would not be surprised if the ECB already raises interest rates this summer.
The figures on wage increases and unemployment are important, especially as Draghi is hopeful that economic growth will rebound. With low and falling unemployment, wages are rising faster and (importantly) rising faster than inflation. This increases purchasing power in the eurozone.
Extend loans
What I also expect in March is that the ECB will extend the special long-term loans for banks in the currency union (TLTROs). That counter will (it now looks like) close next year. However, it would not surprise me if the ECB (looking at the overall situation) errs on the side of caution and still leaves that window open.
And if the bank does raise interest rates this year, I expect the ECB will very slowly loosen monetary policy. The bank has not forgotten the lesson from the beginning of the last crisis. In other words: the very low EURIBOR rates will remain very low for a long time, just like savings interest rates.