ECB Signals Rate Cut, QE as Global Stimulus Push Picks Up
Governing Council changes policy language to prime for easing.
(Bloomberg) -- The European Central Bank sent its strongest signal yet that monetary support for the euro-area economy will be stepped up after the summer break, with lower interest rates and renewed asset purchases on the table.
President Mario Draghi and fellow policy makers said on Thursday they expect borrowing costs to stay at present levels “or lower” through at least the first half of 2020, opening room for a September reduction in the deposit rate from the record low of minus 0.4%. Officials also signaled they will restart their bond-buying program if needed.
“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
Germany’s 10-year bond yield dropped to a record-low minus 0.42% and the euro slid 0.3% to as low as $1.1108. Bank shares rallied as policy makers said they’ll consider measures to offset the squeeze on lenders’ profitability from negative rates. Draghi will explain the decision at 2:30 p.m. in Frankfurt.
The ECB is changing tack -- just months after officials ended quantitative easing and started preparing to exit extraordinary stimulus -- amid a euro-area economic slowdown that has pushed inflation further below its goal, a shrinking manufacturing sector, and with risks such as global trade tensions still prominent.
Other central banks are also turning dovish amid slowing global growth with the Federal Reserve expected to cut rates next week. Turkey delivered the biggest interest-rate cut in at least 17 years earlier Thursday. Australia’s central bank chief Philip Lowe said he’s ready to ease policy further if his back-to-back cuts fail to revive economic growth
What Bloomberg’s Economists Say
“The ECB tweaked its forward guidance, indicating that the deposit rate will be cut imminently. The first statement of the day also provided a strong signal that additional asset purchases will begin soon. We look for both of those measures to materialize in September.”
-- David Powell and Maeva Cousin. See their ECB REACT
The Governing Council also added a key line clarifying its “commitment to symmetry” in the inflation goal, or flexibility to be either above or below it.
Draghi has stated before that the ECB’s goal is symmetric, but staff only recently started studying introducing a specific aim. That could embolden policy makers to pursue monetary stimulus for longer, and keep price growth elevated for a while after a period of weakness to ensure price growth is entrenched.
New President
Draghi’s push comes three months before his eight-year term ends and he hands over to Christine Lagarde, the former International Monetary Fund chief. Economists and investors predicted he would wait until the next meeting in September before adding stimulus, giving time to see the Fed’s decision and to update the ECB’s own economic projections.
Economists surveyed by Bloomberg predict that officials will cut the deposit rate by 10 basis points in September, and announce a new round of QE starting in January and running throughout 2020.
Draghi said last month that the euro zone will need more stimulus if the economic outlook doesn’t improve. While data since then has been mixed, some of the signs are grim. A report on German business confidence published earlier Thursday showed the weakest sentiment in more than six years and the lowest expectations since 2009.
Inflation continues to run well below the ECB’s goal of just under 2%, and market-based measures suggest consumer-price growth is unlikely to pickup any time soon. Industrial demand and production are falling as automobile producers and suppliers grapple with slowing demand from the key market of China.
German manufacturing is in its deepest slump in seven years. Auto parts maker Continental AG cut its estimated profit margins on Tuesday to reflect expectations of a significant slowdown in global vehicle output. Chemical producer BASF SE also lowered targets because of the sector’s stagnating growth figures.
The geopolitical climate will also remain a challenge. The yearlong U.S.-China trade war and the possibility of a disorderly British departure from the European Union on Oct. 31 are contributing to the headaches.
--With assistance from Piotr Skolimowski, Kristie Pladson, Brian Swint, Fergal O'Brien, Catherine Bosley, Lucy Meakin, David Goodman, Jill Ward, Zoe Schneeweiss, Chad Thomas, Iain Rogers, Lukas Strobl, Alexander Kell, Craig Stirling, Olivia Konotey-Ahulu, Kristian Siedenburg and Catarina Saraiva.
To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net
To contact the editor responsible for this story: Paul Gordon at pgordon6@bloomberg.net
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