MNI REVIEW: New TLTROs As ECB Pushes Rates Guidance To 2020

By Luke Heighton

     FRANKFURT (MNI) - Key interest rates will remain unchanged until at least

2020, the European Central Bank said Thursday, as it announced a third round of

targeted long-term refinancing operations and sizeable cuts to its eurozone

growth outlook.

     Rates will remain at present levels "at least through the end of 2019," ECB

President Mario Draghi said, dropping earlier guidance, introduced in June 2018,

for no change at least "through the summer."

     The decision to implement a new round of cheap funding for banks was aimed

at preserving lending conditions and smoothing the transmission of monetary

policy, Draghi said. It had been agreed upon "unanimously" by the ECB's

Governing Council. "Given the complexity of the package, this is a very, very

positive sign for the cohesiveness of the governing council, " he added.

     ECB staff GDP growth projections for the euro area were cut from 1.7% to

1.1% in 2019, and 1.7% to 1.6% in 2020, but remained at 1.5% in 2021. The

headline inflation forecast was slashed from 1.6% to 1.2% in 2019; 1.7% to 1.6%

for 2020, and from 1.8% to 1.6% in 2021, as Europe experiences what Draghi

called a "sizable moderation that will extend into the current year."

     --WEAKER CYCLICAL MOMENTUM

     "The broad-based worsening of economic sentiment indicators across

countries and sectors in recent months suggests that more persistent adverse

factors have also been at play and that the underlying cyclical momentum is

somewhat weaker than previously assessed," ECB staff concluded.

     Draghi acknowledge that "weaker economic momentum is slowing the adjustment

of inflation towards our aim", and 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."

     The further lowering of the ECB's refinancing rate of -0.4% in the event of

future negative economic shocks was not discussed by the Governing Council,

Draghi said.

     Instead he insisted that "supportive financing conditions, favourable

labour market dynamics and rising wage growth", plus "ample" monetary policy

stimulus, meant the Council was confident the ECB would achieve its medium-term

inflation objectives, albeit at a slower pace.

     Overall, Draghi concluded, "the probability of a recession is very low", as

are the prospects of a de-anchoring of inflation expectations. But he

acknowledged that the balance of risks remain tilted to the downside, and was

unlikely to be altered by today's decisions.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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