Draghi's Goodbye Gift Taken With Disappointment by Markets

(Bloomberg) -- Mario Draghi’s latest and potentially last salvo to boost the euro-area economy risks not being enough.

The European Central Bank president, who will leave office in October after spending his entire eight-year tenure crisis-fighting, announced a new round of long-term loans to banks and promised interest rates won’t be lifted from record lows until 2020.

The fresh effort to aid growth came as the ECB delivered a huge cut to 2019 growth forecasts. Continued threats to the outlook meant Draghi pushed to over-deliver on stimulus, according to people familiar with the matter.

But it was met with a lukewarm response from investors and economists. Despite praising Draghi for again moving faster than expected, they also worry that the lending to banks will be on less favorable terms than in the past.

“If you want to design extra stimulus, this falls short” for commercial banks, said Nick Kounis, an economist at ABN Amro. “The ECB may further push out forward guidance and there’s a rising risk that they’ll need to take further action beyond that, restarting the asset purchase program.”

The euro, which fell to its weakest level since June 2017 on Thursday, strengthened modestly in European trading Friday. The currency is trading at $1.1218, up 0.2 percent.

Draghi's Goodbye Gift Taken With Disappointment by Markets

The new loans will have a two-year maturity, compared with four in the previous round, and the ECB didn’t offer certainty that the terms will be as generous.

The targeted longer-term refinancing operations, or TLTROs, are an attempt to protect the economy from trade tensions, a slowdown in China and the uncertainties around Brexit. Yet the moves also raise concern that things are worse than people previously thought. Some policy makers consider the institution’s downgraded growth forecast for 2019 is still too optimistic.

Bank stocks initially rose on the news, but then dropped the most in three months as the terms were digested. The euro weakened and European government bonds rose.

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“Calling it dovish would be a gross understatement,” said Jordan Hiscott, chief trader at Ayondo Markets. “At this stage, should the situation deteriorate, I’m unsure how many options the ECB has for an effective easing policy.”

While the ECB slashed its forecasts for growth and inflation, Draghi said officials expressed confidence that the probability of a recession in the 19-nation bloc as “being very low.” The Italian cited growing wages, an improving labor market and consumption that remains “by and large in good shape.”

What Bloomberg’s Economists Say

“The measures fail to offer a material injection of fresh stimulus. If anything, it’s a modest reduction compared with current liquidity conditions and market pricing for interest rates.”

Jamie Murray and David Powell, Bloomberg Economics
Click here for the full research.

If the economy picks up, there’s a chance that banks won’t need to take advantage of the new loans on offer. On the other hand, there’s also a risk that policy makers will have to restart the bond-buying program they just brought to a conclusion at the end of last year.

“There’s no longer any sign of monetary-policy normalization,” said Alexander Krueger, an analyst at Bankhaus Lampe. “If anything, extreme crisis fighting has become more ingrained.”

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