Eurozone Monetary Policy September 2019


Eurozone: Draghi delivers parting stimulus bang; loosening policy for the first time since 2016

September 12, 2019

The European Central Bank (ECB) unveiled a broad package of stimulus at its meeting on 12 September, in order to revive growth and inflation in the downbeat Eurozone economy. The ECB decided to cut the deposit rate by 10 basis points deeper into negative territory, announced it was restarting quantitative easing, opened up its forward guidance, along with other changes to targeted longer-term refinancing operations (TLTRO III) and reserve remuneration. At large, the measures represented slightly more stimulus than market analysts had expected. Accordingly, the deposit rate now sits at a new record-low of minus 0.50%, while the other main interest rates are unchanged, the refinancing rate at 0.00% and the marginal lending rate at 0.25%.

The Bank’s asset purchase programme (APP) will be restarted on 1 November, at a pace of EUR 20 billion per month, slightly below market analysts’ expectations. However, notably, the APP was left open-ended, with President Mario Draghi stating in the accompanying press conference that it will run “for as long as necessary to reinforce the accommodative impact of our policy rates”. Adding to the accommodative measures, the Bank stated it will reprice its TLTRO III’s and include an incentive for banks to increase lending. Moreover, the Bank will introduce a two-tier system for reserve remuneration, which should further support monetary policy transmission and reduce pressure on banks’ lending margins.

Soft economic data, persistently low inflation, modest inflation expectations and ample downside risks to the outlook drove the ECB to unleash the shot of stimulus to shore up prospects. While, all-in-all, the measures should loosen monetary conditions and boost activity, it remains to be seen, however, if it will be enough to improve the outlook. A weak industrial sector, a less favorable global backdrop and geopolitical concerns have hampered growth in recent quarters and are seen continuing to plague the outlook ahead. Accordingly, the ECB revised down its growth and inflation forecasts at the meeting and now sees GDP expanding 1.1% in 2019 (previous: +1.2%) and 1.2% in 2020 (previous: +1.4%). Harmonized inflation is now seen at 1.2% in 2019 (previous: 1.3%) and 1.0% in 2020 (previous: 1.4%).

Looking ahead, the ECB turned more dovish in its forward guidance, removing a timeframe regarding interest rates. Draghi stated that “key ECB interest rates [are set] to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.” Draghi also called out on Eurozone governments with fiscal space to enact expansionary policies to support growth, likely a call at Germany to unleash stimulus.

All of our panelists project the refinancing rate to remain at 0.00% this year.

Author: Angela Bouzanis, Lead Economist

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