The European Central Bank changed tack on its tightening plan on Thursday, pushing out the timing of its first postcrisis rate hike until 2020 at the earliest and offering banks a new round of cheap loans to help revive the euro zone economy.
The bolder-than-expected move came as the U.S. Federal Reserve and other central banks around the world are also holding back on rate hikes. It underlined how a global trade war, Brexit uncertainty and simmering debt concerns in Italy are taking their toll on economic growth across Europe.
The policy changes cast ECB President Mario Draghi once again as nurturer of confidence in the bloc’s still-fragile economy, only months after the bank announced the end of four years of unprecedented asset purchases, and as Draghi himself prepares to hand over the reins to a successor later this year.
Whereas the bank had previously said rates would remain at their record low levels through the summer, it said it now expected them to stay there “at least through the end of 2019”.
While investors had long stopped pricing in an ECB rate hike this year, few expected the bank to change its policy message at this meeting. The surprise move caused yields on government bonds to fall and the euro slipped to $1.1244, about 0.6 per cent down on the day, after the announcement.
Policymakers had prepared for more nuanced measures and Draghi caught them off guard by pushing for unexpectedly generous stimulus after forecasts showed economic growth fading, four sources familiar with the discussion said.
When fresh projections showed growth at just 1.1 per cent in 2019, less than half of what the ECB expected just a year ago, even more hawkish rate-setters agreed that there was little value in delaying or staggering decisions.
“We are (in) a period of continued weakness and pervasive uncertainty,” Draghi told a news conference as he announced cuts to the bank’s growth and inflation forecasts.
Noting that, unusually, the ECB had not changed its assessment that risks are tilted to the downside even after tweaking policy, Draghi cited external factors such as protectionism, the still-uncertain nature of Britain’s exit from the European Union and vulnerabilities in emerging markets.
“In a dark room you move with tiny steps – you don’t run but you do move,” Draghi said of the bank’s efforts to provide guidance to financial markets in a period of uncertainty.
“Today we are not behind the curve – but we weren’t even before.”
In addition, the ECB launched a third Targeted Long-Term Refinancing Operation (TLTRO III) consisting of two-year loans aimed partly at helping banks roll over €720-billion in existing TLTROs and so averting a credit squeeze that could exacerbate the economic slowdown.
Commercial banks have already started restricting credit in the face of falling industrial output and exports.
As reported by Reuters, the new loans will carry a floating rate tied to the ECB’s main refinancing operation, currently set at zero.
“Like the outstanding TLTRO program, TLTRO-III will feature built-in incentives for credit conditions to remain favourable,” the ECB said.
Thursday’s announcement came four years to the month after the ECB launched a quantitative easing (QE) asset purchase program to prevent sub-zero inflation from further hitting an economy still reeling from the euro zone debt crisis.
In total it spent some €2.6-trillion ($2.94-trillion) buying up mostly government, but also corporate debt, asset-backed securities and covered bonds, at a pace of €1.3-million a minute.
The ECB’s move to extend the horizon for steady rates was likely to be perceived as a policy reversal for the central bank that only ended bond-buying in December and which had signalled an interest rate hike for later this year.
“It is clearly an attempt to stay ahead of the curve and to avoid unwarranted tightening of the ECB’s monetary stance,” ING economist Carsten Brzeski wrote in a note to clients.
“At the same time, however, it is also a bit of a gamble as any next step from here to tackle a severe downswing of the economy would now require unprecedented measures.”