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Euro drops sharply after Reuters reported a split in the EBC

Euro drops sharply after Reuters reported a split in the EBC

Erik Holm - Head of media

Euro falls on the ECB’s anonymous sources saying that bank members do not believe in accelerating growth in the second half of the year.

Euro broke the two-day rally after Reuters reported that some ECB politicians expressed skepticism that economic growth would recover in the second half of the year. Some European Central Bank politicians believe that the bank’s economic projections are too optimistic, as China’s weak economic growth and trade tensions persist. A significant minority of ECB voting members at a policy meeting last week expressed doubt that a long recovery of growth would take place in the second half of the year and some even questioned the accuracy of the forecast ECB models given the history of downward revisions.

Given that the ECB uses these forecasts as a key factor in monetary policy decision making, a further slowdown in growth and inflation projections would increase the likelihood that the first post-crisis increase in bank interest rates (which is expected next year) will be postponed even further.

EUR/USD fell from 0,2% to 1.1280 against 1.1314, the daily high. According to a European trader polled by Bloomberg, intraday investors closed their positions as the euro was unable to rise to 1.1350.

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An official representative of the ECB declined to comment. Until now the central bank has argued that many of the growth constraints are temporary so the economy will recover in the second half of the year. The fall in exports and the level of confidence almost brought Germany into recession at the end of the last year.

Euro bond yields are falling amid reports that the ECB’s policy doubts that growth will accelerate in the second half of the year. EBC President Marion Draghi said over the weekend that there are signs that these factors are weakening even though there is still strong political uncertainty. But some of his fellow members of the Board of Governors were not so sure of this and argued that the obstacles to growth were far from temporary so there is no reason to predict any significant recovery.

Some decision-makers of the ECB believed that bias could be presented in the bank’s forecasts, as they always show upward-slope inflation approaching the EBC target (2%). Sources added that ECB President Marion Draghi deemed to be open to discuss problems but showed little interest in deeply immersed in the forecasting methodology just a month before the end of his term.

Others told colleagues at a monetary policy meeting that the main reason for the poor projections was simply the wrong assessment of the failure in the labor market. The Eurozone has created about 10 million jobs since the worst days of its debt crisis and now there more people working in the way that record-breaking employment requires, suggesting that the labor market is more flexible than in the past and the natural rate of unemployment has decreased.