Eurozone has dodged Brexit bullet so far

The European Central Bank (ECB) has decided not to change rates or quantitative easing, which has not come as a huge shock to anyone. So far, the eurozone economy has dodged the Brexit bullet, however growth remains tepid, inflation is far below target and political risks are growing, including potential fallout from the Brexit negotiations.

Ian Kernohan, economist at Royal London Asset Management, said: “There was no great excitement in the ECB meeting – interest rates, quantitative easing purchases and the March 2017 timetable remain as before. Although growth forecasts have been trimmed, Mario Draghi did say that the ECB did not discuss extending quantitative easing.”

The ECB will continue its asset purchases of €80bn per month until at least March 2017. It takes a while for the ECB to buy enough bonds to build up the critical mass to have the desired effect of pushing investors out of government bonds and into riskier assets.

“We have only just begun to the see the effects of the latest QE programme coming through,” said Adrian Lowcock, investment director at Architas.

“The eurozone economy has been fairly stable, although uninspiring, and markets have taken the UK’s decision to leave the EU in its stride. The ECB has no pressing need to act now and it is far better they keep their powder dry and save any further stimulus for times they might really need it.”

Shilen Shah, bond strategist at Investec Wealth & Investment, agreed: “Despite the market noise caused by the Brexit vote, the ECB believes the impact on eurozone GDP is likely to be only moderately negative, with the GDP forecast lowered by 0.1% in 2017 and 2018.

“Base effects from higher energy prices mean that inflation is likely to drift up in 2017 and 2018 to 1.2% and 1.6% respectively, however underlying inflationary pressures remain somewhat weak.

“Any extension of the ECB bond programme was only hinted at, with Draghi suggesting no extra stimulus for the time being. The scarcity of bonds that meet the bond buying programme’s criteria may however force the central bank’s hand before the programme’s scheduled end date of March 2017.”