ADVERTISEMENT

ECB Loads Up Stimulus Salvo as Draghi Laments Worsening Outlook

ECB president says inflation pressures are still muted.

ECB Loads Up Stimulus Salvo as Draghi Laments Worsening Outlook
Mario Draghi, president of the European Central Bank (ECB), gestures while speaking during a rates decision news conference in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

(Bloomberg) -- President Mario Draghi set the stage for his European Central Bank to deliver another round of monetary stimulus in September to combat the euro area’s severe economic slowdown.

“This outlook is getting worse and worse,” Draghi said in Frankfurt on Thursday after a meeting of the ECB’s Governing Council. “It’s getting worse and worse in manufacturing, especially, and it’s getting worse and worse in those countries where manufacturing is very important.”

Policy makers committed to review a swathe of options including interest-rate cuts and renewed quantitative easing. Still, the euro and bond yields erased earlier declines as the president said Governing Council members had “different nuances” over the exact design of any package.

“Markets will keep speculating about the composition of the stimuli, and were somewhat disappointed with the lack of details,” said Piet Christiansen, an economist at Danske Bank, which is expecting 20 basis points of rate cuts and more QE. “Still, it’s a matter of when and how ECB will act, no longer if.”

Hours after data showed German businesses are the most pessimistic in a decade, the ECB adjusted its pledge on interest rates -- already at record lows -- to signal they could be cut deeper, and put staff to work on a range of other options.

Traders in money markets are pricing in the first 10-basis point rate cut in more than three years in September, with an encore at the January meeting. The euro was up little changed at $1.1157 at 5:01 p.m. Frankfurt time.

The German sentiment mirrors the mood across the euro zone as a contraction in manufacturing, in part because of global trade tensions, threatens to infect the services sector. Draghi said the risk of a broad recession is “pretty low” but he repeatedly noted that consumer-price growth remains well short of the institution’s goal of just under 2%, making significant support necessary.

“On the inflation front, we don’t like what we are seeing,” he said. “That’s very important.”

The Governing Council also added a key line to its statement clarifying its “commitment to symmetry” in the target. That reflects a willingness to prolong stimulus to keep price growth elevated for a while to compensate for previous weakness. Staff only recently started studying a revamp of the ECB’s specific aim.

“The Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.”
- ECB policy statement

The ECB’s latest move comes as central banks around the world turn dovish, suggesting monetary easing will soon be amplified. The U.S. Federal Reserve is widely expected to cut rates next week. Earlier Thursday, Turkey delivered the biggest interest-rate cut in at least 17 years and Australia’s central bank chief Philip Lowe said he’s ready to ease policy further.

Yet Draghi said monetary policy alone cannot combat a downturn and urged governments to play their part.

“If there were to be a significant worsening in the euro-zone economy, it’s unquestionable that fiscal policy, a significant fiscal policy, becomes of the essence,” he said.

That could be a challenge. On Thursday, German Finance Minister Olaf Scholz brushed off warning signals for Europe’s largest economy in an interview with Bloomberg Television. He said the government has no concrete plans to spur economic growth.


What Bloomberg’s Economists Say

“Taken together, the wording of today’s decision and press conference strengthen our conviction that the ECB will deliver a meaningful dose of stimulus in September.”
-- Maeva Cousin and Jamie Murray. See their ECB REACT

Bank shares initially rose after officials said they’re studying how to alleviate the pain of negative rates by exempting some reserves. That squeeze on profitability at lenders, who struggle to pass the charge to customers, threatens to impair lending.

The ECB’s next meeting in September will be Draghi’s penultimate before his eight-year term ends and he hands over to former International Monetary Fund chief Christine Lagarde. Waiting until then gives officials time to see the impact of the Fed’s decision and await more economic data. They’ll also have updated macroeconomic forecasts, which have typically provided the rationale for any change in policy.

“All this is pretty complex and needs preparation,” the president said. “We decided we wanted to see the next projections before taking action.”

The IMF said on Thursday that its staff support the ECB’s commitment to maintaining strong monetary accommodation for a prolonged period. Draghi, who said Lagarde will be an outstanding president of the central bank, ruled out an effective job swap by saying he is “not available” to run the Washington-based fund.

--With assistance from Piotr Skolimowski, Kristie Pladson, Jana Randow, Fergal O'Brien, Catherine Bosley, David Goodman, Jill Ward, Lucy Meakin, Brian Swint, John Ainger, Zoe Schneeweiss, Iain Rogers and Olivia Konotey-Ahulu.

To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Andrew Atkinson

©2019 Bloomberg L.P.