ECB cuts 2019 forecast, widens stimulus

FRANKFURT • Some European Central Bank policymakers consider the institution's slashed growth forecast for 2019 as still too optimistic, according to people with knowledge of the matter.

The officials argued at Thursday's meeting that the pick-up assumed in the projections for the second half of the year might not materialise, said the people, who asked not to be identified because the discussions were private. ECB president Mario Draghi's remark that growth risks are still tilted to the downside reflects some of those concerns, one person said.

Mr Draghi himself pushed for the enhanced package to support the economy which the Governing Council unanimously approved, the people said.

The ECB cut its forecast for this year by the most since the advent of its quantitative-easing programme four years ago, predicting economic expansion of 1.1 per cent from 1.7 per cent forecast in December. Policymakers unveiled a new round of monetary stimulus including more loans for banks and a longer pledge to keep interest rates low.

Lingering doubts on the new outlook raise the prospect of further action if the slowdown worsens.

The measures announced on Thursday included a two-year lending programme to bolster credit supply in the economy. The scope of the announcement exceeded many economists' expectations, even if the terms of the extra funding for financial institutions disappointed some investors.

The ECB said that the interest rate on the new long-term loans will be indexed to its benchmark rate, and said there would be built-in incentives to encourage lending.

Policymakers are leaning towards setting the initial interest rate at a premium above their benchmark, offering to reduce that premium if banks meet their credit targets, the people said. Committees have been tasked to sketch out the details of the new programme, but there is no rush to finish work ahead of the ECB's meeting next month, they said.

Officials also discussed the effect of negative interest rates on bank balance sheets at the meeting, pressed by the Bank of France governor Francois Villeroy de Galhau. The Governing Council commissioned a new study on the matter from staff, according to the people. Mr Draghi reiterated on Thursday that he sees negative rates as "quite successful".

An ECB spokesman declined to comment on the Governing Council's deliberations.

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A version of this article appeared in the print edition of The Straits Times on March 09, 2019, with the headline 'ECB cuts 2019 forecast, widens stimulus'. Print Edition | Subscribe