Eurozone: Dovish ECB pushes back forward guidance, reintroduces TLTROs
March 7, 2019
Ebbing economic momentum across the Eurozone pushed the European Central Bank (ECB) to rethink its monetary policy on 7 March. Policymakers left interest rates at record-low levels—with the refinancing rate at 0.00%, the marginal lending rate at 0.25% and deposit facility rate at minus 0.40%—but modified their forward guidance and introduced new stimulus intended to put a floor on the recent cool-off. Accordingly, they also lowered their growth forecasts for the currency bloc and now see full-year growth at 1.1%, 1.6% and 1.5% between now and 2021 (previously: 1.7%, 1.7% and 1.5%).
Amid the onslaught of downbeat economic data, including tepid fourth-quarter growth through end-2018 and the further deterioration of industrial output into January, the ECB took a dovish tilt and reintroduced favorable commercial-bank loans in a bid to stimulate the real economy. With these=, officially known as the third round of targeted longer-term refinancing operations (TLTRO-III), policymakers intend to keep credit flowing to consumers over the next two years—long enough to ride out any downturn, in their estimation. ECB President Mario Draghi struck a downbeat tone, acknowledging that “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.”
Highlighting its dovishness, the ECB pushed back the timing of any first rate hike in a rare adjustment of its forward guidance. Policymakers now expect interest rates to “remain at their present levels at least through the end of 2019”; beforehand, they previously only saw them doing so through late summer. In addition, policymakers emphasized that the ECB would continue to reinvest the principal payments from maturing securities “for an extended period time”, which should help keep conditions accommodative. Meanwhile, despite an inflation target of below but close to 2.0%, policymakers lowered their inflation forecasts through 2021.
Commenting on the ECB’s moves, analysts at Goldman Sachs acknowledged that:
“Today’s Governing Council meeting was more dovish than expected. […] That said, today’s meeting does not signal a fundamental shift in the ECB outlook. The staff projections still imply a notable pickup in growth in H2, the TLTROs were widely expected at some point before June and the guidance extension looks small compared to the extent of the inflation downgrade. We still expect the first hike in mid-2020 and think the Governing Council will see little need for near-term policy changes if the economy regains some momentum from here. But we would expect ECB officials to consider additional policy easing if downside risks materialise, including a strengthening of the Governing Council’s state-dependent part of the forward guidance.”
Author: Christopher Thomas, Economist