ECB to Play for Time as Growth Outlook Sours: Decision Day Guide

(Bloomberg) -- For the first time in a decade, European Central Bank officials are looking at a slowing economy without plans to increase stimulus.

Policy makers are likely to confirm after their Thursday meeting that monetary support has peaked despite signs of a deteriorating outlook. Their argument: record-low interest rates and 2.6 trillion euros ($3 trillion) of public and private sector bonds bought under quantitative easing will continue to bolster growth and keep financing conditions favorable.

ECB to Play for Time as Growth Outlook Sours: Decision Day Guide

Investors are already a few steps ahead. They’re interested in when the ECB intends to start its tightening cycle, after the U.S. Federal Reserve all but promised to slow the pace of its rate increases in the wake of a stock slump. Another open question is whether the ECB intends to renew long-term funding for banks -- helping them to meet regulatory standards and continue lending to companies and households.

The policy decision will be announced at 1:45 p.m. and President Mario Draghi will face reporters 45 minutes later. Economists don’t expect him to do much beyond mention those issues, though some say he won’t have a choice but to adopt a more negative tone in his assessment of risks to the economy.

What Our Economists Say...
“The Governing Council won’t offer a quantitative view on the depth and persistence of the slowdown until March, but it could formally acknowledge the surprise by describing risks to the outlook as to the downside. This month’s headline-grabbing wildcard? The Governing Council could discuss the benefit of a TLTRO extension.”

--Jamie Murray, David Powell and Maeva Cousin. Read our preview here

Investors, bankers and former policy makers attending the World Economic Forum in Davos, Switzerland, this week see the global economy stumbling though not quite falling over. In the euro area, the “R” word has made a comeback with Italy probably in recession at the end of 2018 and Germany only narrowly escaping one. Draghi has dismissed concerns about a contraction, but said the region’s slowdown may last longer than previously thought.

Fresh numbers on Thursday underlined the picture of a weakening economy, with German manufacturing shrinking and euro-area Purchasing Managers Indexes pointing to the worst performance in more than five years.

ECB to Play for Time as Growth Outlook Sours: Decision Day Guide

While most economists surveyed by Bloomberg predict the ECB chief will reiterate that risks are broadly balanced, though moving toward the downside, a quarter of respondents see him downgrading his assessment. Chinese growth has hit a three-decade low, trade tensions continue to simmer and uncertainty has increased over how and when the U.K. will leave the European Union.

Such a change in language could indicate that the ECB will take a slower approach than currently outlined -- similar to the Fed, which shifted from “gradual” tightening to a “patient” stance. Still, it’s unlikely that policy makers will change their official guidance that leaves room for an interest-rate increase as early as autumn.

ECB to Play for Time as Growth Outlook Sours: Decision Day Guide

To assuage concerns about a premature exit from unconventional policy, Draghi may offer fresh insight into the ECB’s study of long-term loans to banks. Existing ones will start to expire in June 2020, and a suggestion was made at last month’s Governing Council meeting to “revisit the contribution” they made to stimulating the economy. Most economists expect a formal announcement by March, and an allotment of fresh funds by June.

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