The European Central Bank slashed its growth and inflation forecasts for 2019 and lowered those for 2020 and 2021 on Thursday, acknowledging that Europe's slowdown is longer and deeper than earlier thought.
With a global trade war weighing on confidence, industrial production and exports have taken a dip, exacerbated by a string of domestic difficulties, from German industry's struggle to adapt to new car emissions regulations to protests in France. Germany, the bloc's biggest economy, stagnated last quarter and Italy is in outright recession, raising the risk that a temporary slowdown becomes a more lasting downturn as business confidence is sapped by a steady flow of negative news, according to Reuters.
The Frankfurt institution now expects the euro economy to expand by 1.1 per cent this year, significantly down from 1.7 per cent in the bank's previous forecast. For 2020, it now expects growth of 1.6 instead of 1.7 per cent.
The bank kept its 2021 forecast of 1.5 per cent expansion unchanged.
The euro dipped on Thursday after the ECB postponed the timing of its first post-crisis rate hike to 2020 at the earliest and launched a new round of cheap loans to banks.
"The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary," the ECB said.
It had previously said rates would remain at their record low levels through the summer.
The decision to tweak the bank's forward guidance on rates was a surprise for many investors, although the move in the euro was relatively small, Bloomberg reported.
The single currency dropped 0.2 per cent to $1.1275 from above $1.13 before the decision.
In addition, the ECB launched a third Targeted Long-Term Refinancing Operation (TLTRO III) consisting of two-year loans partly aimed at helping banks roll over €720 billion (Dh2.97bn) in existing TLTRO and avoid a credit squeeze that could exacerbate the current economic slowdown.
"While such an announcement was expected at some point in the coming years, the market is welcoming this proactivity," said Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, referring to the ECB moves.
Commercial banks have indeed already started restricting credit in the face of falling industrial output and exports, threatening to reinforce the slowdown.
As reported by Reuters, the new loans will carry a floating rate tied to the ECB's main refinancing operation, currently set at zero.
"Like the outstanding TLTRO programme, TLTRO-III will feature built-in incentives for credit conditions to remain favourable," the ECB said.
