BCN-01, 02 ECB eyes response as slowdown fears grow

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ECB eyes response as slowdown fears grow

FRANKFURT AM MAIN, Jan 24, 2019 (BSS/AFP) – The European Central Bank will
hold off sudden moves Thursday after removing a pillar of support to the
eurozone economy, analysts expect, though it could already be eyeing ways to
respond to slower growth.

Frankfurt policymakers are caught at an intermediate stage of withdrawing
crisis-era stimulus, having wound up purchases of government and corporate
bonds — so-called “quantitative easing” (QE) — but facing an economy that
is still too weak to lift interest rates from historic lows.

Low growth could hold the central bank back from reaching its goal of
inflation close to, but below 2.0 percent.

“The ECB will likely acknowledge rising downside risks to the outlook for
growth without shifting its policy stance or rate guidance significantly,”
predicted Florian Hense of Berenberg bank.

Fuelling concerns over a weaker eurozone outlook, the International
Monetary Fund (IMF) this week downgraded its 2019 growth forecast for the 19-
nation currency bloc to 1.6 percent — slightly lower than the ECB’s 1.7-
percent estimate.

And a further data point will come early Thursday, when a regular
purchasing managers’ index (PMI) will show whether December’s slowdown has
bedded in ahead of President Mario Draghi’s 2:30 pm (1330 GMT) press
conference.

– Wait it out –

Policymakers agreed in December to close out QE after pumping a total of
2.6 trillion euros ($3 trillion) into the financial system.

The scheme aimed to power lending to the real economy of businesses and
households, lifting economic growth and boosting inflation towards the ECB
target.

It is likely too soon for governors to tell whether the withdrawal of what
Draghi last month called “the crucial driver of recovery in the eurozone”
since 2015 has put the brakes on growth.

And the Italian ECB chief also underscored a slew of one-off factors, such
as tougher emissions tests slowing the vital car industry, weighing on
business activity late last year.

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“The ECB probably does not want to sound too alarmed, lest that might
unsettle nervous markets even further,” Berenberg’s Hense said.

Instead, it will likely wait until March — when central bank staff issue
new quarterly growth and inflation forecasts — to draft a response.

Analysts expect Draghi to reiterate Thursday that the bank will keep
interest rates low “at least through the summer of 2019” and that
reinvestment of the bank’s massive stock of bonds will continue to prop up
financing conditions for governments, firms and households.

“We expect a cautious tone but no change in the policy stance or
communication” at the monthly press conference, Frederic Ducrozet of Pictet
Wealth Management said.

– Cheap cash for banks –

The ECB has two relatively uncontroversial tools left in its box to tackle
growth and inflation hiccups: offering a new round of low-interest loans to
banks and extending its time horizon for raising interest rates.

“Markets are already looking further” than this summer for the next rate
hike, Bank of America Merrill Lynch economist Gilles Moec noted.

“To create a shock (on markets) you would have to give a still further
time horizon” sometime in 2020, he added — an extension likely to be
resisted by policy “hawks” on the ECB’s governing council.

With inflation last month falling from 1.9 to 1.6 percent and “core” price
growth — ruling out volatile items like energy and food — at just 1.0
percent, action might nevertheless be needed.

Rather than talking rate hikes, policymakers “may soon have to dust off
past language hinting at further policy loosening,” suggested Capital
Economics analyst Andrew Kenningham.

On Thursday, that could mean hints that the ECB is studying a new wave of
low-interest loans to keep banks supplied with cash, followed by a concrete
decision in the months to come.

BSS/AFP/HR/0920