ECB Urged Swift Analysis, No Hasty Decision on New Lending
(Bloomberg) -- European Central Bank officials are setting up their meeting in two weeks as a key session to decide if the euro-area slowdown is bad enough to warrant action.
Policy makers have demanded that analysis on long-term loans for banks is done quickly, though they haven’t fully committed to implementing a new round of funding. Given that more than 700 billion euros ($795 billion) of existing loans will mature next year, they said they’ll give “some consideration’’ to the issue.
“While any decisions in this respect should not be taken too hastily, the technical analyses required to prepare policy options for future liquidity operations needed to proceed swiftly,” the ECB said in the account of its January policy meeting.
The decision to look closer at new loans came amid agreement on the Governing Council that risks to the euro-area outlook have increased. Some of the ECB’s top officials have in recent days laid the groundwork for adjusting policy, following the footsteps of other central banks like the Federal Reserve.
The ECB cited risks including global trade disputes and the threat of a disorderly Brexit. Policy makers argued it’s difficult to judge the severity and persistence of the current soft patch, agreeing that they need to see updated projections to better read the situation.
That partly explains why they’re maintaining an element of caution about the next step. A similar situation is playing out at the Fed, which has paused tightening but signaled that if the economy improves, an interest-rate increase later this year can’t be ruled out. Markets had taken a different view ahead of the publication of the minutes of the Fed’s January meeting on Wednesday.
“No clear-cut conclusions could be drawn regarding the implications of slower growth in the short term for the outlook for activity in the medium term,” according to the ECB account. It will assess the situation “in more depth” in March, when it will also have new staff forecasts.
More optimistic officials put forward arguments that the risks could still be described as broadly balanced amid lower oil prices and fiscal stimulus. But the account also noted that the slowdown “appeared to be deeper and more broad-based than previously anticipated.” While external factors were blamed, officials are worried this could eventually spread to investment.
The document also noted weaker inflation, partly related to oil costs, could could push down inflation expectations.
The worsening growth outlook has already prompted investors to push back expectations for a rate increase to 2020. Policy makers noted that this is consistent with their commitment to keep interest rates unchanged at least through the summer and in any case as long as warranted by the economic outlook.
Chief economist Peter Praet said this week a change in the ECB’s plans to tighten borrowing costs could be the first safeguard against a deeper downturn. French central-bank Governor Francois Villeroy de Galhau has also mentioned tweaks in language as an option to respond to a “significant” slowdown.
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