ECB to keep interest rate at zero, says Barclays economist

Michael Gapen says Paul Ryan’s border adjustment tax unlikely to be approved in US

US president Donald Trump:  has been warming to the idea of a “border adjustment tax”. Photographer: Andrew Harrer/Bloomberg

US president Donald Trump: has been warming to the idea of a “border adjustment tax”. Photographer: Andrew Harrer/Bloomberg


The European Central Bank will keep its main interest rate at zero “for the foreseeable” future, according to one of Barclays’ top economists, even as euro zone inflation has breached the bank’s target for the first time in more than four years.

Euro zone inflation rose by 2 per cent in February, against the ECB’s target which is just below that rate. This was driven by a higher-than-expected 2.2 per cent surge in the German consumer prices, which was driven by rising energy costs. The news during the week prompted fresh calls from German politicians and economists for the ECB to rein in its loose monetary policies.

However, speaking to The Irish Times during a visit to Dublin this week, Barclays chief US economist Michael Gapen said: “It’s probably right for inflation in Germany to be above the European average, given where their economy is.”

He said that while headline inflation was likely to peak internationally in the first three months of 2017 as a rebound in energy prices filters through, the top figure is likely to stabilise in subsequent quarters. Core euro zone inflation in February, which strips out energy, was unchanged for the third straight month at 0.9 per cent.

Political risk

“We don’t think ECB policy will change significantly, because of the ECB’s emphasis on core inflation, which needs to firm over time. You also have some political risk in the near-term that could weigh on asset prices, business sentiment and capital investment,” Mr Gapen said, referring specifically to the French presidential election.

Polls indicate that French right-wing candidate Marine Le Pen will end up in a run-off vote in May against independent centrist candidate Emmanuel Marcon.

Mr Gapen said while Barclays sees the ECB “tapering” its current $2.3 trillion quantitative easing bond-buying programme by the end of this year, it is likely to continue to buy government and corporate bonds throughout most if not all of 2018.

Meanwhile, Mr Gapen, who was in Dublin to address an American Chamber of Commerce Ireland event on Thursday, said he expected that efforts by Republican speaker of the House of Representatives Paul Ryan to push through a so-called border adjustment tax will fail, even though US president Donald Trump has been warming to the idea.

Under Mr Ryan’s vision, the border adjustment would tax imports at 20 per cent while exempting exports. This, along with broader US tax reforms envisaged by Republicans, including Mr Trump, to cut the main 35 per cent corporate tax rate, could have major implications for US multinationals based in Ireland.

“We don’t see a border adjustment tax at this time as having sufficient support to make it through,” said Mr Gapen, noting that while House Representatives are pressing the proposal, some senior Senators from the same party oppose it. “We think it’ll just get whittled away through lobbying.”