Some ECB Officials Doubt 2019 Outlook Even After Cut

(Bloomberg) -- Some European Central Bank policy makers consider the institution’s downgraded growth forecast for 2019 is still too optimistic, according to people with knowledge of the matter.

The officials argued at Thursday’s meeting that the pickup assumed in the projections for the second half of the year might not materialize, said the people, who asked not to be identified because the discussions were private. President Mario Draghi’s remark that growth risks are still tilted to the downside reflects some of those concerns, one person said.

Draghi himself pushed for the enhanced package to support the economy which the Governing Council unanimously approved, the people said.

The ECB cut its forecast for this year by the most since the advent of its quantitative-easing program four years ago, predicting economic expansion of 1.1 percent. That brings the central bank close to the gloomy forecasts the OECD issued this week, and below the median forecast of economists Bloomberg surveyed in February.

Meeting the new forecast will depend on the pickup in the second half, which some at the ECB still think is a reasonable assumption.

“It’s a significant slowdown,” Bank of France Governor Francois Villeroy de Galhau said on French radio BFM Business Friday. “It’s not a recession and we’ve got good reason to think the slowdown is temporary.”

The ECB’s new round of monetary stimulus involves more loans for banks and a longer pledge to keep interest rates low.

Lingering doubts on the new outlook raise the prospect of further action if the slowdown worsens. An unexpected fall in German factory orders in January gave another reason for the caution, even as French industrial output rebounded.

The scope of Thursday’s ECB announcement exceeded many economists’ expectations, even if the terms of the extra funding for financial institutions disappointed some investors.

The interest rate on the new long-term loans will be indexed to the benchmark rate, and there’ll be built-in incentives to encourage lending.

Policy makers are leaning toward setting the initial interest rate at a premium above their benchmark, offering to reduce that premium if banks meet their credit targets, the people said. Committees have been tasked to sketch out the details of the new program, but there’s no rush to finish work ahead of the ECB’s April meeting, they said.

Officials also discussed the effect of negative interest rates on bank balance sheets at the meeting, pressed by France’s Villeroy. The Governing Council commissioned a new study on the matter from staff, according to the people. Draghi reiterated on Thursday that he sees negative rates as “quite successful.”

An ECB spokesman declined to comment on the Governing Council’s deliberations.

--With assistance from Carolynn Look.

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net;Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Craig Stirling

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