ECB may end negative interest-rate policy in 2020

FRANKFURT: The European Central Bank (ECB) will end its negative interest-rate policy in January 2020 and start paying for deposits eight months after that, according to a Bloomberg survey of economists.

Liftoff is predicted for September next year, and the deposit rate is seen climbing to 0.25%, from minus 0.4% currently, by the end of 2020.

Policymakers took a big step this month toward scaling back unprecedented stimulus, reducing monthly € asset purchases to 15bil (US$17bil). With the programme set to be € capped at 2.6 trillion at year-end, interest rates have moved back to the center of attention.

While the ECB currently doesn’t plan to tighten borrowing costs until at least after next summer, some officials have publicly discussed strategies to communicate their intentions – not just with regard to the first rate step but also the subsequent pace of increases.

“Until now, the ECB’s forward guidance concentrates on the timing of the first rate hike,” said Kristian Toedtmann, an economist at Dekabank in Frankfurt. “But when summer 2019 comes closer, the ECB should also more actively steer market expectations about how fast policy rates will rise over the medium term” to avoid a “too-strong tightening of financial conditions.”

In forecasting the path of interest rates, economists have to weigh a wide range of risks. Italy’s budget crisis has jumped to the top on the list of concerns in the survey, as the nation’s bond yields surge and European Union officials voice their discontent over its spending plans.

“The political situation in Italy is by far the biggest risk for the eurozone economy but it’s not clear what the ECB can do about it,” said Azad Zangana, an economist at Schroder Investment Management in London. “It can’t be seen to intervene with policy to support a single government.”

Analysts also see trade tensions clouding the outlook. While the euro area isn’t directly affected by the spat between the US and China, tit-for-tat tariffs are threatening to disrupt global supply chains and aggravate an economic slowdown in the Asian country that’s set to reduce demand around the world. — Bloomberg