ECB Seen Offering Generous Loans to Banks to Boost Feeble Growth

31 May 2019, 06:13 AM IST

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The European Central Bank will offer euro-area banks generous terms on its upcoming long-term loans when it meets next week but won’t do anything to soften the impact of negative rates, economists predict.

Respondents in a Bloomberg survey said the interest rate on the two-year loans will be below the ECB’s benchmark rate -- currently zero -- if banks hit lending targets to help the currency bloc overcome its economic weakness. A majority see the rate at -0.25% or lower.

Respondents cited trade tensions as the biggest risk to the outlook, though said a cyclical downturn may also be underway.

“The risk of an economic slowdown is calling for more monetary accommodation,” said Kristian Toedtmann, an economist at Dekabank in Frankfurt.

ECB Seen Offering Generous Loans to Banks to Boost Feeble Growth

ECB President Mario Draghi is widely expected to unveil details of the bank loans on June 6 after the Governing Council meets in Lithuania. Policy makers will be reviewing updated economic forecasts that will show whether officials still foresee an upturn in the second half of the year.

Measures to reduce the pain of the central bank’s negative deposit rate are unlikely, according to the survey. Banks say the 0.4% charge on excess reserves parked at the central bank cuts their profit margins because they can’t easily pass it onto customers.

Draghi has said the need for mitigation measures will be reviewed. The concern is that the squeeze will hinder banks’ willingness to lend, though policy makers have shown little appetite for actions such as exempting some deposits from the rate.

The ECB has promised to keep interest rates at record lows until at least the end of this year, and economists said they expect that guidance to stay unchanged for now.

At their last meeting in April, some ECB policy makers they had become less confident in predictions for an upturn. Data since than have failed to paint a clear picture, and economists say the new forecasts are unlikely to deviate much from the previous outlook.

The ECB will stick to the view that the recovery is “delayed, not derailed,” said Piet Christiansen, senior ECB and euro-area analyst at Danske Bank in Copenhagen. “This entails a continued easing bias and downside growth risk assessment and no change in forward guidance.”