A new 50 euro currency bank note is displayed during its unveiling at the European Central Bank (ECB) headquarters in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

ECB Can Sound More Confident in Economy by Cutting Its Forecasts

(Bloomberg) -- The European Central Bank’s pessimism over its economic outlook might not last long even if the euro area fails to pick up speed -- instead it’ll just revise the projections to reflect the heightened risks.

Governing Council members Francois Villeroy de Galhau and Vitas Vasiliauskas said on Friday that policy makers expect to cut their 2019 growth prediction in March when the quarterly forecasts are updated.

Unexpectedly weak economic data since the December projections forced a change in the ECB’s language when policy makers met on Thursday, with President Mario Draghi saying the risks to the growth outlook “have moved to the downside.” Downgrading the forecasts in March could allow the ECB to say that the risks to the -- revised -- projections are again broadly balanced.

The language matters to investors because it can drive expectations of when the central bank is likely to tighten policy. The euro initially fell when Draghi spoke on Thursday, and market pricing suggests the institution won’t be able to raise interest rates until at least next year.

Policy makers had an intense debate over how to assess and describe the stumbling blocs facing the euro-area economy, according to central-bank officials familiar with the matter. The Governing Council made a deliberate choice to steer clear of a previously used phrase that the balance of risks was “tilted to the downside,” the people said, asking not to be named because the meeting was private.

Persistence Problem

At the heart of the discussion was uncertainty over the nature of the slowdown and whether it is temporary or persistent, the people said. An ECB spokesman declined to comment.

Draghi hinted at the disconnect when he said some governors argued that much of the current weakness is likely to wash out once uncertainty over trade prospects dissolve, while others cautioned that a broad deterioration across all industries was threatening confidence. The decision to change the risk assessment was unanimous, he said.

Executive Board member Benoit Coeure, a contender to become the next ECB president, said in a Bloomberg TV interview from the World Economic Forum that the scale of the economy’s deceleration surprised officials.

“Risks to global trade have materialized,” he said. “A lot of the uncertainty is political, has political sources, first and foremost global trade.”

Long-Term Loans

Villeroy de Galhau, also tipped to be in the running to succeed Draghi later this year, told Bloomberg TV in Davos that “part of the slowdown is temporary.” In the medium term, growth will be supported by favorable financing conditions, employment and wage gains, as well as low energy prices, he said.

The Governing Council’s next policy decision and projections will be on March 7, when policy makers may also debate providing more support. Economists and investors have speculated that the ECB will make new long-term loans available to banks to prevent financial conditions from tightening when outstanding ones are repaid or become ineligible for meeting capital rules.

Draghi, Coeure and Villeroy all said the ECB would need a monetary-policy case to make a new offer of cheap funding though. Asked what the central bank could do to mitigate the region’s economic slowdown, Vasiliauskas said “the ECB has proved that it has enough of tricks” and “potentially TLTROs could play a role.”

©2019 Bloomberg L.P.