Timing of ECB interest rate rise remains in balance

Is the European Central Bank’s strategy of planning to raise interest rates next year starting to run off course? The latest growth figures showed that the euro-zone economy expanded by just 0.2 per cent quarter on quarter in the three months to September, well below expectations of 0.4 per cent growth.

While inflation is picking up and at 2.2 per cent in October is now above the ECB’s 2 per cent target, much of this is due to once-off energy price rises.

The jury is still out on whether the recovery will be strong enough to justify higher interest rates after summer next year, the timescale indicated by the ECB.

But before that, the ECB has an earlier decision to make. Does it go ahead with its plan to stop its programme of quantitative easing (QE) – buying government and other bonds – by the end of this year? So far it is sticking to its guns and some of its governing committee were out today reinforcing the message.

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But any further weakening in growth and inflation may yet make this awkward for the ECB, which has already some €2.2 trillion in assets on its balance sheet from the QE programme.

The plan is to end the asset purchases by December and then monitor the data next year and increase interest rates in the fourth quarter, assuming this is justified.

However, the growth figures – with annual euro-zone growth of 1.7 per cent after 2.7 per cent last year – would need to pick up. And while headline inflation is over 2 per cent, if you excluded volatile food and energy prices it is just 1.3 per cent.

Meanwhile there is plenty to worry about for 2019, including a possibly disorderly Brexit, trade tensions with the United States and a big row between Italy and the European Commission over plans in Rome to run a budget deficit next year.

It would be a big step for the ECB to delay the ending of its asset-purchase programme. However, the timing of the first rise in interest rates in more than a decade remains in the balance.

The plan – for now – will remain to do so next autumn and publicly the ECB is unlikely to signal any significant change. But it has always left enough room for itself to manoeuvre, should the figures disappoint.