ECB leaves room for interest rate increase late next year

The European Central Bank still intends to cap its bond-buying by year-end and leave room for an interest-rate increase late next year, even amid mounting signs that the euro-area economy is wilting under global pressures.

The Frankfurt-based institution said it will buy €15 billion of bonds a month through December, with a final decision to end the programme contingent on incoming information. Policy makers reiterated that interest rates will remain at their present record lows “at least through the summer” of 2019.

Attention now turns to President Mario Draghi’s press briefing at 2.30pm in Frankfurt, where he will explain the Governing Council’s decision.

The euro was barely moved by the statement, trading up 0.2 per cent at $1.1411 at 1.56pm.

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"Expect a dovish spin in the press conference," said Christoph Rieger, Commerzbank AG's head of fixed-rate strategy. "Deteriorating economic and market sentiment are increasing the risks to the ECB's baseline scenario."

A key point investors will focus on is the assessment of economic prospects. Since policy makers characterised risk to the outlook as “broadly balanced” six weeks ago, domestic momentum has weakened and uncertainty around global growth has increased.

A gauge for private-sector growth in the euro area slowed to the weakest since 2016 - a level IHS Markit said Wednesday “would historically be consistent with a bias toward loosening monetary policy.” Confidence in the region’s largest economy slid.

Mr Draghi's list of concerns is long. Underlying inflation continues to be muted, trade tensions between the US and China are starting to take their toll on the Asian economy and export-focused companies in Europe and around the world, and risks of a disorderly Brexit are running high.

A standoff between the Italian government and the European Commission over the country's budget probably also features prominently. The spread between Italian and German 10-year bonds is hovering near a five-year high, approaching levels seen as unsustainable for banks.

Moreover, global markets have tumbled this month. An equities rout wiped out US gains for the year, and the Stoxx Europe 600 is down almost 8 per cent this month.

Investors are also looking for information on whether the ECB will change its reinvestment policy once net purchases end. – Bloomberg