Eurozone prepares for interest rate cut as growth slows

The European Central Bank has hinted it could cut interest rates to tackle a slowdown in the eurozone economy.

The bloc has been struggling with a manufacturing recession that risks unravelling years of monetary stimulus.

The ECB, which kept interest rates unchanged on Thursday, said it saw rates at present or lower levels until mid-2020.

It is also considering other measures, including resuming quantitative easing.

This is when a central bank pumps money into the economy by buying up bonds and other assets.

Eurozone interest rates have been near zero for years and the bank had been hoping to normalise them.

In a news conference, ECB boss Mario Draghi said there was evidence of resilience in the eurozone economy, particularly in services and construction, but “the outlook is getting worse and worse”, especially for manufacturing.

The reasons for this include uncertainty caused by trade tensions and “the possibility of a hard Brexit”.

Eurozone inflation is also stuck well below its 2% target, while industrial production in Germany, the bloc’s biggest economy, is down.

Analysis

Andrew Walker, BBC economics correspondent

The ECB has already thrown just about everything at the problem it faces – inflation that is in its judgement persistently too low. And yes the ECB does worry that inflation can be too low.

The constant changes taking place in any economy mean that the prices of goods and different types of labour have to change relative to one another. That’s easier if it can be achieved without prices or wages having to fall (in cash terms), so a bit of inflation can help that process.

A bit of inflation also gives interest rate policy some extra heft – it’s that bit easier to get REAL interest rates very low if prices are rising moderately.

And though the ECB focuses publicly on its inflation objective, it is also the case that growth in the Eurozone is not that strong. A bit of stimulus MIGHT help, although the effectiveness of the unusual policies the ECB has pursued – interest rates of zero and below, and massive quantitative easing – is a matter of controversy.

“There is far and wide nothing to be seen of the second-half recovery hoped for [in the eurozone] in many places,” Commerzbank economist Joerg Kraemer said. “Germany is in a grey area between a marked growth slowdown and a recession.”

However, the ECB said consumer confidence, employment and bank lending remained robust.

The euro fell after the announcement, trading down about 0.31% against the pound at 88.96p.

The ECB has already used up a lot of firepower in stabilising the eurozone economy, pumping trillions into the bloc through quantitative easing.

But its balance sheet is equivalent to 40% of the bloc’s GDP, suggesting that the limits of its stimulus are near.

The US Federal Reserve is also expected to announce a rate cut this Thursday after warning of growing risks to the global economy.

Last week he told US lawmakers that “uncertainties about the outlook have increased”, citing weakness in other major economies and trade war worries.