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ECB Acts Early to Curb eurozone Slowdown

The European Central Bank on Thursday announced fresh measures to juice the slowing eurozone economy, saying interest rates would remain at historic lows at least until the end of 2019 and offering new rounds of cheap loans to banks to keep credit flowing.

Markets have long priced in "lower for longer" interest rates as there has been little sign of inflation perking up in the eurozone.

But the ECB's launch of new quarterly "targeted long-term refinancing operations" (TLTROs) for banks from September is an unexpectedly early move to counteract a euro area slowdown.

ECB staff were expected to offer a slashed growth and inflation forecast for 2019 after the March meeting, matching a gaggle of international organizations like the European Commission, International Monetary Fund and OECD.

Geopolitical uncertainty, stuttering output in emerging markets and trade conflicts helped put the brakes on expansion in late 2018, alongside painful one-off effects like new emissions tests that have slowed the car industry.

The weak patch meant that just three months after ending a 2.6-trillion-euro ($2.9 trillion) "quantitative easing" (QE) stimulus for the 19-nation eurozone in December, the ECB was under pressure to show it still had options to buttress growth.

"The measures, as such, are not a major surprise but the moment of the announcement is," economist Carsten Brzeski of ING Diba bank said.

"It is clearly an attempt to stay ahead of the curve" by preventing the work the ECB has done to loosen financial conditions in recent years from being undone, he added.

President Mario Draghi will unveil the central bank's updated growth forecasts and explain the thinking behind its decision to intervene quickly at a 2:30 pm (1330 GMT) press conference.

- Cheap loans to banks -

The ECB's renewal of its TLTRO scheme will allow banks to borrow from the ECB for periods of up to two years once per quarter between September 2019 and March 2021.

"These new operations will help to preserve favorable bank lending conditions and the smooth transmission of monetary policy," the ECB said.

Like previous rounds of TLTROs, the program "will feature built-in incentives for credit conditions to remain favorable."

In the past, those incentives have included negative interest rates for banks showing they were lending more to firms and households -- effectively meaning the ECB would pay them to borrow its cash.

The ECB has loaned banks more than 700 billion euros ($790 billion) in previous TLTRO rounds.

- Strong storms, strong foundations -

The ECB's intervention comes at a moment when many had felt it was blocked from responding to the soft patch in growth after years of crisis firefighting.

The end of its massive bond-buying program and rates fixed at historic lows gave the appearance of little room to maneuver.

Meanwhile growth has slowed and both "soft" indicators such as business confidence and "hard" data like industrial production have fallen in recent months in the single currency area.

ECB President Mario Draghi acknowledged in January that "risks surrounding the euro area growth outlook have moved to the downside" -- but singled out external factors as the cause while highlighting strong domestic fundamentals like falling unemployment.

But the stronger labor market has not had the expected impact of boosting inflation towards the ECB's target of close to, but below 2.0 percent -- the core of its mandate to secure price stability over the medium term.

Year-on-year price growth was just 1.5 percent in February and 1.4 percent in January, Eurostat said, with the "core" figure -- ruling out volatile items like food, alcohol and energy  -- even lower at 1.0 percent.

The ECB will likely further reduce its inflation outlook Thursday from December's projections, which estimated the rate would rise from 1.6 percent this year to 1.8 percent by 2021.

One question on many observers' minds will be how the central bank can respond in future if the latest round of action does not stoke growth and bring inflation back on track.

"We doubt... that the new measures will be enough to reverse the economic slowdown," Capital Economics analyst Andrew Kenningham said.

ING's Brzeski labeled the big-bang move "a bit of a gamble".

"Any next step from here to tackle a severe downswing of the economy would now require unprecedented measures," he noted.

Source: Agence France Presse


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