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Draghi to Hike Rate Before Step Down?

ECB President Mario Draghi may succeed in raising the European Central Bank (ECB)’s borrowing rate ahead of his term ending in October 2019, according to a panel of surveyed economists.

With an end to asset purchases scheduled for the end of the year, most of those surveyed expect E.U. policy chiefs to hike the deposit rate at the beginning of Q4 2019, from negative 0.4 percent to negative 0.2 percent.

Although such a move would be much earlier than existing market pricing for an increase in Q1 2020, the economists who took part in the survey recognise that there are certain challenges on the horizon.

Alan McQuaid, chief economist at Merrion Capital Group said, “There remain a lot of bridges, both economic and geopolitical, to be crossed before the ECB can feel totally happy about raising interest rates”, before adding that there is “every chance” Draghi could end his term as President without overseeing a rate hike.

Monetary policy and forward guidance measures are not expected to be changed when E.U. Governing Council members meet for the first time following the Summer recess on Thursday. What is expected is that Council members will confirm the slowing of bond purchases in October 2018; end bond purchases entirely by year’s end; and maintain borrowing rates until at least midway though 2019.

Economic data out of Europe earlier this week indicated that tensions over trade tariffs were beginning to drip down to the German manufacturing sector, with factory orders dropping once again in August, the sixth such fall this year.

More discomfort may be in store for the European economic bloc after Donald Trump indicated that the newly-agreed truce on trade tariffs between the U.S. and the E.U. might be short-lived.
One of the surveyed economists, Attilio Bertini, who is employed as head of research at Credito Valtellinese said, “The greatest risk remains linked to the commercial tensions triggered by America”. However, Bertini went on to state that he sees the risk of an all-out global trade war at less than 30 percent.

Who Will Follow Draghi?

The field of potential successors to Mario Draghi has narrowed to ten, with Finland’s Erkki Liikanen pulling ahead of Philip Lane (Ireland) and Francois Villeroy de Galhau (France). Germany’s Jens Weidmann, an early favourite, dropped off after rumours that German Chancellor Angela Merkel would prefer to push for a senior E.U. position for country, rather than pressing the ECB to appoint the current Bundesbank head as the next president of the ECB.

The Trailing Pack

Olli Rehn: Finland
DOB: 31 March 1962
Present: Governor of the Bank of Finland
Past: Minister of Economic Affairs; European Commissioner for Enlargement; European Commissioner for Economic and Monetary Affairs and the Euro

Benoit Coeure: France
DOB: 17 March 1969
Present: Member of the Executive Board of the European Central Bank
Past: Head of France’s debt-management office; Economics professor at l’Ecole Polytechnique

Klaas Knot: The Netherlands
DOB: 14 April 1967
Present: President of the Dutch central bank
Past: Deputy Treasurer General of the Dutch Ministry of Finance; Director of the Supervisory Policy Division at De Nederlandsche Bank

Klaus Regling: Germany
DOB: 3 October 1950
Present: Chief Executive Officer of the European Financial Stability Facility; Managing Director of the European Stability Mechanism
Past: Director General of the European Commission’s Economic and Financial Affairs; Head of the European Financial Stability Facility

Christine Lagarde: France
DOB: 1 January 1956
Present: Managing Director of the International Monetary Fund
Past: Minister of Economic Affairs, Finance and Employment; Minister of Agriculture and Fishing; Minister of Trade


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