Draghi Talks Tough on Stimulus as ECB Discusses More Rate Cuts

Bloomberg.- Mario Draghi hardened his language as he said the European Central Bank won’t shy away from action to support the euro-area economy as growth weakens.

Policy makers are “determined” to act if needed, citing the “prolonged persistence of uncertainties” and the “rising threat of protectionism,” the ECB president said in Vilnius after the Governing Council met. Some officials raised the prospect of interest-rate cuts or restarting quantitative easing and there is “considerable headroom” for more QE, he added.

The council extended its pledge to keep interest rates at record lows and announced details on a program for infusing lenders with more cheap cash. That wasn’t enough for some investors in a week when global central banks including the Federal Reserve turned more dovish. German bond yields and the euro rose. Still, bank stocks gained on the details of the long-term loans.

“The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.” – ECB statement

Trade tensions buffeting the global economy have spurred monetary policy makers to move toward easing. Australia reduced rates on Tuesday for the first time in three years and India cut for a third time this year on Thursday, while Fed Chairman Jerome Powell shifted closer to acting.

Draghi said ECB economists downgraded their outlook for growth and inflation next year. The euro-zone economy is now seen expanding 1.4% in 2020 compared with a March forecast for 1.6%. Inflation is seen at 1.3% this year, 1.4% next year and 1.6% in 2021 — well below target.

The long-term loans to banks will start in September and initially be priced at the main refinancing rate plus 0.1 percentage point. They can fall as low as the deposit rate plus 0.1 percentage point if banks meet lending benchmarks. The main refinancing rate is currently zero, and the deposit rate is minus 0.4%.

Targeted Longer-Term Refinancing Operations

Market-based inflation expectations are at their lowest since 2016, a trend that Draghi said policy makers take seriously, while stressing that there is no threat of deflation and a very low probability of recession.

The ECB’s action on Thursday “takes into account the prolongation of uncertainty with respect to what we saw and believed in March,” Draghi told reporters, citing Brexit and rising populism as well as trade.

Markets “might see a much broader phenomena, where the multilateral order that we have lived in since World War II” is disappearing, he said. “And then of course the uncertainty about Brexit negotiations, the uncertainty of vulnerabilities of certain emerging-market countries, which are important.”

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