Mario Draghi, president of the European Central Bank (ECB), arrives for a rates decision news conference in Frankfurt, Germany. (Photographer: Jasper Juinen/Bloomberg)

ECB Readies Response Amid Euro-Area Slowdown: Decision Day Guide

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The European Central Bank is putting all the pieces in place for new support for the economy as policy makers debate how quickly they need to act in response.

Forecast downgrades are set to justify a new round of funding for banks, according to people familiar with the matter. Staff have been working on the design of the loans, and the question is whether the Governing Council will unveil all details on Thursday or wait until April. Given the changed economic backdrop, there’ll also be a focus on policy makers’ language on interest rates.

The decision will be announced at 1:45 p.m. in Frankfurt, and President Mario Draghi will face reporters at his regular press conference 45 minutes later.

New Loans for Banks

Draghi’s top lieutenants, chief economist Peter Praet and markets head Benoit Coeure, have set up the meeting for a discussion about new longer-term loans for banks. Euro-area lenders, roughly half of them in Italy and Spain, already hold more than 700 billion euros ($793 billion) in so-called TLTROs, and may look to replace them from this summer.

Without new funds, the risk is that banks will curtail access to credit and worsen the slowdown.

ECB Readies Response Amid Euro-Area Slowdown: Decision Day Guide

Signs that lending to consumers and companies is slowing could swing policy makers in favor of fresh funding, although the exact features of a new program could prove a sticking point. Draghi could just flag on Thursday the new TLTROs are in the works.

Forward Guidance

One possible change would be to extend the period of record-low interest rates. Current guidance says policy makers expect borrowing costs will stay unchanged at least through the summer, but flagging economic momentum has taken the wind out of expectations that 2019 will see any hike.

Bundesbank President Jens Weidmann, one of the contenders to succeed Draghi in November, doesn’t expect a rate increase this year and says investors’ expectations for lift-off in 2020 are plausible. The OECD slashed its forecasts for the euro area on Wednesday and urged the ECB to signal a delay to tightening.

What Bloomberg’s Economists Say

“A weaker economic outlook makes adjustments to the Governing Council’s guidance on interest rates inevitable. But with policy makers expressing comfort with market pricing, there’s little urgency. Instead, we expect a change in June.”

--Jamie Murray and David Powell, economists
Click here to view the research.

New Forecasts

Like the OECD, the ECB’s projections on Thursday will probably see cuts to growth and inflation, people familiar with the matter told Bloomberg. The question is the severity of the downgrade to the more important medium-term outlook.

ECB Readies Response Amid Euro-Area Slowdown: Decision Day Guide

The Governing Council agreed in January that risks to the outlook have moved to the downside, a first sign they’re getting worried. Yet the ECB’s next chief economist, Philip Lane, has expressed confidence that stimulus will be enough to accommodate what he considers will be “limited” downward revisions to 2019-2021 forecast.

External Environment

Europe’s export-heavy economy has suffered from the rough and tumble of the U.S.-China trade war. Factories in the region saw export orders drop the most in almost six years in February and the risk of a disorderly Brexit later this month is weighing on sentiment.

While China is trying to boost growth through tax cuts, the impact might not benefit the euro area as much as previous stimulus. A trade deal between China and the U.S. would help confidence -- and possibly investment -- though Europe could lose out longer term.

Domestic Fundamentals

The euro-area economy could still pull itself up by its own bootstraps. Manufacturing has taken a battering, but service-sector activity has improved, and the mood in France looks on the mend after violent street protests. The unemployment rate is the lowest in more than a decade and German public sector workers just won a bumper pay increase.

Italy remains the euro zone’s weak link. The region’s third-largest economy is in recession and the OECD expects 2019 to see the economy post its first full-year contraction since 2013.

©2019 Bloomberg L.P.