The European Central Bank slashed the euro area growth and inflation outlook on Thursday, citing the lingering uncertainties that are mainly external, and offered more cash to banks via long-term loans to boost lending to a slowing economy.
The bank also said it now expects Eurozone interest rates to remain at the current level at least till the end of this year and beyond, until inflation converges with its target of “below, but close to 2 percent”.
The Eurozone growth outlook for this year was cut to 1.1 percent from 1.7 percent seen in December, the March 2019 ECB staff macroeconomic projections showed.
The outlook for next year was trimmed to 1.6 percent from 1.7 percent. The projection for 2021 was maintained at 1.5 percent.
The risks surrounding the euro area growth outlook are still tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets, the ECB said.
“While there are signs that some of the idiosyncratic domestic factors dampening growth are starting to fade, the weakening in economic data points to a sizeable moderation in the pace of the economic expansion that will extend into the current year,” ECB President Mario Draghi said in his introductory statement.
“The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment.”
Weaker economic momentum is slowing the adjustment of inflation towards the target, Draghi added.
The bank slashed the inflation outlook for this year to 1.2 percent from 1.6 percent predicted in December. The projection for next year was lowered to 1.5 percent from 1.7 percent. The forecast for 2021 was cut to 1.6 percent from 1.8 percent.
The impact of the slowdown in external demand, and other country and sector-specific factors on growth is turning out to be somewhat longer-lasting, the bank noted. That said, the bank expects the effect of these adverse factors to unwind in future.
Citing the futures prices for oil, the ECB said headline inflation is likely to remain at around current levels before declining towards the end of year.
“Measures of underlying inflation remain generally muted, but labor cost pressures have strengthened and broadened amid high levels of capacity utilization and tightening labor markets,” the bank noted.
“Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.”
Earlier on Thursday, the Governing Council left the key interest rates unchanged after the policy session in Frankfurt, as expected. Eurozone interest rates were raised last in July 2011 by 25 basis points.
“The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, 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 percent over the medium term,” the ECB said.
The subtle change in the forward guidance on interest rates from the “summer” of 2019 to “the end” suggests the first interest rate hike since the 2007-09 global financial crisis would happen only next year.
The main refi rate is currently at a record-low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate is at 0.25 percent.
The bank said it will launch a new series of targeted longer-term refinancing operations, or TLTRO-III, starting in September 2019 and ending in March 2021, each with a maturity of two years.
The announcement of new TLTRO loans took most economists by surprise as they had expected the bank to only signal such a move this month and to unveil it only in April.
The ECB expects the new loans to help to preserve favorable bank lending conditions and the smooth transmission of monetary policy.
Speaking to reporters, Draghi said the latest policy decision was unanimous, and called that a positive sign for cohesiveness of the rate-setting body and its deliberations.
The bank chief added that the Governing Council stands ready to adjust all of its policy instruments as appropriate when necessary.
He said that policymakers were confident about the baseline forecast and agreed the probability of a recession in the euro are remained very low.
Draghi also noted that several policymakers proposed extending the calendar of forward guidance to March next year.
Regarding the TLTRO, the ECB Chief said nobody would take up those loans unless subsidies were offered.
He also said that negative interest rates have been quite successful and that their effect on banks’ balance sheets is complex. ECB is yet to discuss specific mitigating measures.