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ECB Slashes Growth Forecasts and Boosts Banks

European Central Bank
European Central Bank

The European Central Bank today unveiled new stimulus measures and cut 2019 growth forecasts from 1.7% to 1.1%.

The euro slid against the yen and dollar after the ECB slashed the outlook for the Eurozone and announced that new funding would be available this year for Eurozone banks, just two months after ending the quantitative easing (QE) programme.

The sharp downgrading for Eurozone growth forecasts for this year is the ECB "coming to terms with reality", said Wolfgang Bauer, fixed Income Manager at M&G Investments. Bauer added that by changing the forward guidance calendar to the end of the year, ECB President Mario Draghi has effectively ruled out an interest rate rise this year. Some market analysts believe today's news effectively pushes the next rate rise to 2021.

The announcement of new "targeted longer-term refinancing operations" or TLTROs will help Spanish and Italian banks in particular, Bauer argued.

Nick Wall, co-manager of the Merian Strategic Absolute Return Bond Fund said the ECB is "taking no chances with the banking system" in providing extra liquidity to banks.

“The ECB’s money presses hadn’t even cooled. Barely weeks after the formal end of Eurozone QE, Mario Draghi is reaching for stimulus once again," said Fexco's head of dealing David Lamb.

While the winding down of the ECB's bond purchase programme had been well flagged from last year, the announcement of new stimulus suggests that ultra-loose monetary policy is here to stay, at least until Draghi leaves his post. Today's drama is not quite in the league of Draghi saying the ECB was ready to do "whatever it takes" to support the Eurozone.

But the new stimulus, so soon after QE had ended, leaves the ECB without much wriggle room to cut rates if the economy needs stimulus in the future. Unlike in the US, where rates have been raised and QE ended, deposit rates in the Eurozone are still negative. Ayondo's head of trading Jordan Hiscott, said: "At this stage, should the situation deteriorate, I’m unsure how many options the ECB has for an effective easing policy going forward."