The European Central Bank is tightening its monetary policy so late in the economic cycle it is at risk of being “stuck with zero rates for the rest of time”, according to Patrick Artus, chief economist at Natixis.
Outgoing President Mario Draghi last week confirmed the ECB would end its quantitative easing programme by December. However, interest rates, which are currently stuck at -0.4%, will not start moving upwards for at least another year.
And some, including David Zahn, head of European fixed income at Franklin Templeton, see no reason for Draghi to raise rates before he leaves office in October 2019. The ECB has not hiked rates since 2011 and Draghi may go through his whole term having never delivered a rate rise.
At the opposite end of the scale, the Federal Reserve has hiked seven times in the past three years, starting in late 2015. The US’s economic expansion could be coming to an end, potentially as soon as within the next three to six months. Artus says the Fed recognises this, so wants to normalise before it’s too late.
Looking at the “dot plot” – where Fed policymakers think rates will be in the future – suggests the US will be at 3%, the assumed neutral rate, by the middle of next year. “The strategy is to be at, or even slightly above, neutral before the economy starts slowing down,” Artus explains.
The ECB, on the other hand, believes it still has plenty of time before it needs to move. It thinks growth will continue to be strong for many years and says there’s still a lot of under-employment on the continent, so it should not be in a rush to normalise.
Professor Artus, though, thinks the reality will be very different. He says that, actually, structural employment is much higher than in the past.
ECB is Seven Years Behind the Curve
“If you’re at full employment, the economy will start slowing down, and then what will happen is that the ECB will never be in a position to normalise its rates. They will be stuck with zero rates basically for the rest of time.
“The economy’s already slowing down. Look at every single indicator – they are all telling the same story.”
But this is not a surprise, claims Professor Artus. The Fed, he says, started QE in 2008; the ECB started in 2015. “In 2015, unemployment in Europe had already started declining for more than two years, so do you start QE when the economy is still very much improving,” he asks.
“I think they were seven years behind the curve – or let’s say six years to be kind to them – and they are still very much behind the curve.”
The Fed stopped quantitative easing in 2014, compared to the ECB, which will end its programme at the end of 2018. “Now, they can only start raising rates in 2019 when it’s too late because I think that in 2019 the expansion will be over so we’ll be stuck with zero rates.
“I prefer very much the strategy of Jerome Powell than the one Draghi’s pursuing.”
