Economic data in Europe failed to impress yesterday as Markit revised down both Services PMI (54.5) and Composite PMI (50.9). In addition, business optimism with regards to future output dropped to its lowest level since early 2015.
The Eurozone has struggled this year as it’s battled with the global slowdown and been caught in the midst of the US trade war, not forgetting ongoing Brexit issues. With minimal growth and interest rates already at 0%, the European Central Bank (ECB) may have limited options at its disposal. Annual inflation is expected to fall to 1.1 percent in July of 2019 from 1.3 percent in the previous month, which could be the lowest reading since February 2018. This has been largely attributed to the slowdown in cost of energy and services.
ECB to potentially cut rates to historic low
There is anticipation that the ECB will reduce interest rates to a new record low of -0.6% before the end of the year and Goldman Sachs has calculated an annual loss to the bank’s earnings of 6%. If rates are cut by 1 percent, 25% would become loss making or break-even. The hardest hit would include Deutsche Bank, UniCredit and Banca Monte dei Paschi di Siena.
Essentially, the region’s banks are charged to hold excess reserves and since the ECB introduced negative interest rates in 2014, Eurozone banks have paid out €21 billion to the ECB.
Just last week Mario Draghi suggested the Eurozone rates may be cut further as the economy wobbles and although Mr Draghi will be replaced by outgoing IMF Managing Director Christine Lagarde, she could potentially adopt a similar cautious approach.
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