Tuesday, 26 October 2021

ECB seen taking tentative step to prop up ailing euro zone

FRANKFURT: The European Central Bank will slash growth forecasts on Thursday and is likely to provide its strongest signal yet that fresh stimulus is coming in the form of more cheap loans, hoping to stop an unexpected slowdown from becoming a downturn.

With a global trade war and Brexit uncertainty scarring the euro zone economy, business confidence has turned negative, raising the risk that recession fears become self-fulfilling and spread from Germany and Italy to the rest of the bloc.

That leaves the ECB with the familiar role of having to prop up sentiment and President Mario Draghi will oblige, albeit with small steps initially.

Such a move is certain to be seen as a policy reversal. The ECB only ended quantitative easing, its biggest stimulus scheme to date in December, and has signalled an interest rate hike for later this year.

But central banks around the world are reversing course, led by the U.S. Federal Reserve, which has signalled a pause in rate hikes and said it will stop shrinking its balance sheet – a boon for stock investors.

The ECB’s first port of call will be to offer banks fresh liquidity to keep credit flowing to corporate borrowers. It will then formally delay a rate hike, which markets do not expect until well into 2020.

The first of those steps is likely to come on Thursday, even if not all the details will be announced. A change in forward guidance on interest rates is not seen just yet as the ECB is expected to stagger its moves to achieve maximum impact.

The bank’s decision is due at 1245 GMT while Draghi’s news conference is scheduled for 1330 GMT.

The problem is that with industrial output and exports shrinking, commercial banks already seem to be restricting credit, threatening to reinforce the slowdown.

Fresh central bank loans, called targeted longer-term refinancing operations, or TLTROs, could prop up bank lending and more importantly, help banks roll over a previous facility.

The ECB fears that if banks start to repay these loans, due to expire next year, its balance sheet will quickly shrink, automatically tightening policy just as the economy needs a bit of extra support.

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