ECB Injects More Stimulus as Draghi Reveals Slashed Forecasts

(Bloomberg) -- Want the lowdown on European markets? In your inbox before the open, every day. Sign up here.

The European Central Bank delivered a fresh round of monetary stimulus in a bid to shore up the weakening economy as it cut its growth forecast by the most since the advent of its quantitative-easing program four years ago.

ECB President Mario Draghi said the euro-zone economy will now expand only 1.1 percent this year, a drop of 0.6 percentage point from forecasts just three months ago. A package of assistance from new loans for banks to a longer pledge on record-low rates is intended to expand existing stimulus, he said.

“The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment,” Draghi told journalists in Frankfurt on Thursday. “The risks surrounding the euro area growth outlook are still tilted to the downside.”

The euro fell for a fifth day, dropping 0.6 percent to $1.1234, while government bonds rose, pushing the German 10-year yield to the lowest since 2016.

But bank stocks dropped as the new loans will have less favorable terms than the ECB’s previous operation. There may also be concern about the ECB’s gloomy prognosis for the economy and the limited ammunition it has left if things worsen.

The ECB is reverting to more monetary support just three months after policy makers decided to end their bond-buying program and hoped to start weaning the euro-area economy off its crisis-era stimulus. The export-dependent European economy buckled under the weight of trade tensions, a slowdown in China and the uncertainties around Brexit.

Draghi said officials expressed confidence that the economy would follow the path outlined in the updated forecasts and consider 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.”

While Draghi said that the package of measures agreed unanimously on Thursday would make the ECB’s policy stance more accommodative and increase the region’s economic resilience, he stressed that options for the central bank are limited.

Policy makers can’t solve problems related to protectionism and Brexit, he said. Thursday’s meeting was their last before the U.K. is set to leave the European Union on March 29.

While many anticipated the ECB would act, an announcement wasn’t expected as early as Thursday. That signals the level of concern among Governing Council members, something that’s been echoed across other institutions and central banks in recent days.

The OECD slashed its forecasts for European and global growth, the Bank of Canada said there’s “increased uncertainty” about the timing of its future rate increases, and New York Federal Reserve President John Williams said the U.S. central bank can be patient about deciding its next move.

“The fact that the climate has become more uncertain doesn’t mean one has to stay put -- you do what you think is right,” Draghi said. “In a dark room you move with tiny steps. You don’t run, but you do move.”

What Bloomberg’s Economists Say

“The Governing Council’s decision today shows it’s taking the slowdown in the euro-area economy seriously...Assuming no big shock from trade policy, Brexit or a re-escalation of tension between Rome and Brussels, conditions should be right for the first rate hike in March 2020.”
--Jamie Murray and David Powell, economists
Click here to view the research.

The ECB’s main move was to revive its Targeted Longer-Term Refinancing Operations with the intention of encouraging banks to provide credit to businesses and customers. The loans will have a maturity of two years, and the interest rate will be indexed to the main-refinancing rate over the life of each operation. Similar to previous offers, the program will have built-in incentives to keep credit conditions favorable.

On rates, officials pledged that they’ll stay at current record-low levels at least through the end of the year, several months later than they previously guided. Some officials at the meeting even argued for pushing guidance on stable rates until March 2020, while others raised the issue of adverse impact of negative rates on bank profits, Draghi said.

--With assistance from Carolynn Look, Nicholas Comfort, Brian Swint, Zoe Schneeweiss, William Horobin, Iain Rogers, Catherine Bosley, Kevin Costelloe, Marcus Bensasson, Jill Ward, Lucy Meakin, David Goodman and Ven Ram.

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow, Craig Stirling

©2019 Bloomberg L.P.