Business Irish

Tuesday 23 July 2019

ECB halts rate rise as eurozone stutters

Banks to be offered cheap loans

End of an era: The ECB will face a major problem if the economy turns sour as the term of Mario Draghi draws to a close
End of an era: The ECB will face a major problem if the economy turns sour as the term of Mario Draghi draws to a close

David Chance

THE European Central Bank has finally recognised the risks of a significant slowdown in the eurozone and said yesterday that a rate rise it had pencilled in for this year would likely not happen until 2020.

It also, belatedly, cut its forecast for economic growth in the 19-member currency bloc to just 1.1pc as well as reducing its inflation forecast to 1.2pc after years in which it has overestimated inflation.

In another surprise move it said it would offer banks a new round of super-cheap loans so they can keep lending to the real economy and avert a sharp slowdown.

"This certainly goes further than most of us thought that the ECB would," said Paul Diggle, senior economist at Aberdeen Standard Investments.

The ECB had pencilled in a rate rise this autumn, although most economist had poured scorn on the idea that it could move so soon with most of the eurozone economy experiencing sharply-deteriorating growth.

The ECB kept its key rates unchanged yesterday at zero for lending to banks and at a minus 0.4pc rate on deposits from commercial banks.

News of the delay in the rate rise and the determination to keep providing financing to banks lifted share and bond markets in Italy, which is most vulnerable of all the euro-area countries to a shut-off in funding. But elsewhere, stocks fell as investors digested the cut in the ECB's growth forecast.

The central bank's recognition of the woes facing the eurozone comes after the Organisation for Economic Cooperation and Development, the voice of the world's richest economies, warned this week that without immediate policy action, the economic woes of the bloc risked triggering a global recession.

The ECB's decision to restart cheap loans to banks is an attempt to offset a squeeze on the balance sheets of vulnerable banks as a June 2020 repayment date for an earlier set of loans drew nearer.

Shweta Singh, managing director of global macro-economic research at consultancy TS Lombard, said the move would give banks time to rebuild their financial buffers.

It does not, she said, address the problem of weakening eurozone growth and loan demand.

The ECB will face another major problem if the economy does turn sour as the term of its president, Mario Draghi, ends on October 31.

He was dubbed "Super Mario" for rescuing the euro from potential collapse in 2012 and will be a hard act to follow.

One reason for Europe's slow recovery from the financial crisis compared with that of the US was dithering over policy and not just one, but two, calamitous interest rises by the ECB that had to be reversed.

Irish Independent

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