ECB predicts low rates in long term
European Central Bank policy maker Ewald Nowotny said on Saturday he expects interest rates to be lower in the long term than they have been historically. In the long term, we should strive to have a normalisation, Nowotny said in an interview on Austrian radio.
We will likely have an interest rate level that is somewhat higher than it is today, but still lower than we have grown accustomed to from earlier times, he told the ORF1 Midday Journal.
Earlier in the week, ECB President Mario Draghi signalled another round of monetary easing, as the economic outlook dims. Staff at the central bank are being asked to prepare options, opening the door to a possible rate cut and more bond buys by September. Nowotny, who is retiring as Austria’s central bank governor and will be replaced later this year by Robert Holzmann, also said that Brexit would hurt the UK more than it would the rest of Europe.
The main negative effects will be felt by Great Britain, he said, adding that Austria would have hardly any effects from Brexit while the damage on the rest of the EU would be relatively minimal.
On the other hand, Bank of England officials will probably keep policy on hold next week as they acknowledge that the economic outlook has worsened materially since May. All but one of the 24 economists surveyed by Bloomberg predict a unanimous vote to maintain the benchmark rate at 0.75 per cent. The risk of a no-deal departure from the European Union under new Prime Minister Boris Johnson and an increasingly gloomy global outlook suggest that policymakers will be cautious.
Officials have scaled back their rate-hike rhetoric and investors are increasingly pricing in rate cuts as the risk of a disorderly Brexit grows. But with a falling pound and stronger wage growth threatening to fuel inflation, officials potentially face a dilemma. Governor Mark Carney is expected to address the trade-off between growth and prices after the BOE publishes its quarterly Inflation Report, alongside the monetary-policy decision, at noon on Thursday.
Economists are virtually unanimous in predicting the BOE will cut its 2019 growth forecast, with around half predicting a downgrade to the following two years. Officials are also widely expected to hike their inflation projections. Policymakers have softened their language about the possibility of interest-rate increases. Michael Saunders, who led the charge for the BOE’s last two rate hikes, has suggested he’s in no rush to begin another push, telling Bloomberg the economy right now is “clearly not overheating.
Chief Economist Andy Haldane, also considered among the more hawkish members of the Monetary Policy Committee, said in a speech this week that the case for keeping policy unchanged is strong and the group should proceed with caution on any loosening. Carney has also warned that damage to the global economy from rising protectionism could be significant and require a major policy response.
While one economist sees a dissenter on the nine-member rate setting committee calling for an immediate cut, most recent comments point to unanimity. Officials may try to address the discrepancy between their official forecasts and market expectations. Carney has said they will explore how best to illustrate the market sensitivities.