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Image: Getty Images/AFP/D. Roland

Eurozone faces new downturn, Draghi admits

January 24, 2019

European Central Bank chief Mario Draghi has warned that weaker growth in the global economy will continue to be felt in Europe. The ECB, which kept key interest rates on hold, is unlikely to raise them until the summer.


The head of the European Central Bank, Mario Draghi, on Thursday said the bank was ready to "adjust all of its instruments" if the economy runs into serious trouble and warned that risks "have moved to the downside."

Draghi blamed "the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility," hinting at continuing worries of the US-China trade conflict and Brexit, among other issues.

"The near-term growth momentum is likely to be weaker than previously expected," he said, before insisting that the ECB was "not out of instruments" to face any economic headwinds.

Read more: China records slowest growth rate in nearly 30 years

Draghi was speaking just an hour after the ECB left its key interest rates and other policy settings unchanged, with the bank's deposit rate remaining at -0.40 percent while the main refinancing rate stands at 0.00 percent.

The ECB chief said a healthy labor market, and rising wage growth was still supporting the eurozone economy, despite its most significant slowdown in half a decade.

He acknowledged that the economy still needed monetary stimulus and that the bank would not raise interest rates from record lows until at least the summer. 

The ECB ended a landmark €2.6 trillion ($3 trillion) bond purchase scheme just weeks ago.

Read more: EU finance reforms dampen Macron's ardor

Markets don't see hike till next year

Draghi's comments will increase market speculation that the bank will delay a tightening in policy for several more months, or even move to cut rates.

Investors see a rate hike only in mid-2020 while a poll of economists by the Reuters news agency predicted the first rise in nearly a decade in the fourth quarter.

On whether the ECB could provide new loans to banks, called Long-Term Refinancing Operations or LTROs, Draghi said several policymakers had raised the issue but that no decision was taken.

Read more: Italy's economic plight, and why it matters

Germany, France and, Italy, the eurozone's biggest economies, barely grew in the fourth quarter of 2018 and survey data showed on Thursday business activity across the euro area expanded at the slowest pace since 2013 at the start of this year.

The International Monetary Fund (IMF) has downgraded its 2019 growth forecast for the 19-nation currency bloc to 1.6 percent — slightly lower than the ECB's 1.7 percent estimate.

Eurozone inflation meanwhile has fallen back, notching up just 1.6 percent in December.

mm/hg (AFP, AP, dpa, Reuters)

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