ECB Warns Slowdown Isn't Temporary: Draghi Announces Bold Stimulus Plan

Mario Draghi surprised even the doves with his bold new stimulus plan. It won't help one iota.

The Wall Street Journal reports ECB Reverses Course With New Stimulus Measures.

The European Central Bank made a major policy reversal Thursday, unveiling plans for fresh measures to stimulate the eurozone’s faltering economy less than three months after phasing out a €2.6 trillion ($2.9 trillion) bond-buying program, making it the first rich-country central bank to ease policy in response to the global slowdown.

The ECB said it would hold interest rates at their current levels at least through the end of this year—months longer than previously signaled—and announced plans for a fresh batch of cheap long-term loans for banks. The first loans will be launched in September, each with a maturity of two years.

Despite the new stimulus, ECB President Mario Draghi said that the risks to the economy remain prevalent, though the likelihood of a recession is very low. Thursday’s decision was unanimous, he said at a press conference. “Given the complexity of the package, I think this is a very positive sign,” he added. The ECB also slashed is forecast for gross domestic product growth this year to 1.1% from 1.7% in December. It lowered its inflation projection to 1.2% from 1.6%, further below the ECB’s target of just under 2%.

Still, the ECB refrained from more extreme measures such as restarting its bond-buying program or cutting its deposit rate further from minus 0.4%. These options weren’t discussed, Mr. Draghi said. “In a dark room, you move with tiny steps,” he said.

Bold New Plans

Please consider ECB's Draghi Surprised Colleagues with Bold Stimulus Plans.

European Central Bank President Mario Draghi caught even dovish rate-setters off guard by pushing on Thursday for unexpectedly generous stimulus after forecasts showed a large drop in economic growth, four sources familiar with the discussion said.

At its policy meeting, the ECB delayed its first post-crisis rate hike into 2020 and offered banks more ultra-cheap loans, arguing that persistent uncertainty from a global trade war to Brexit was causing lasting damage to the euro zone economy.

Policymakers had not expected to change their guidance on interest rates. But Draghi confronted them with forecasts showing growth at just 1.1 percent in 2019, less than half what the ECB predicted a year ago, and proposed a wider set of measures than rate-setters had prepared for, the sources said.

“Growth is below trend now and the output gap is opening up again,” one of the sources said. “It’s is worrying because very little of this slowdown is actually temporary.”

The exceptionally weak growth projection, along with a notable drop in lending, was also the reason why the ECB went ahead with announcing a fresh round of longer-term loans to commercial banks, while giving itself more time to working out the details.

“There was wide agreement that it was right to act now because waiting until April would not have made much sense,” a third source added.

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