April 9, 2019 / 10:21 PM / 11 days ago

ECB's Draghi whets investor appetite for more action

FRANKFURT Reuters) - ECB President Mario Draghi raised the prospect of more support for the struggling euro zone economy on Wednesday if its slowdown persisted, saying the central bank had “plenty of instruments” with which to react.

The European Central Bank has already pushed back its first post-crisis interest rate hike. But with weak external demand taking a toll on export powerhouse Germany, it is coming under pressure to do more to support the bloc - albeit with a depleted policy toolbox.

Highlighting the loss of economic momentum, Draghi said the ECB would price a new series of two-year loans to banks in such a way as to ensure that credit would keep flowing to the economy.

It would also consider measures to mitigate the impact on banks of its negative deposit rate - taken by observers as a reference to a tiered system exempting lenders from paying a charge on some of their idle cash.

But Draghi, who steps down in October, said it was too early to act and deferred any decisions to June.

“We started a process where we will analyze all measures,” Draghi told a news conference after the bank kept policy unchanged, as widely expected. “We need further information that will come to us between now and June.”

The International Monetary Fund said overnight that the global economy was slowing more than expected and a sharp downturn could require world leaders to coordinate stimulus.

But one problem is that, after pushing borrowing costs to record lows and taking 2.6 trillion euro ($2.93 trillion) worth of bonds out of the market to revive inflation, the ECB’s options are limited.

Introducing tiered rates might make it easier to keep its benchmark deposit rate at its current level of -0.4 percent or even cut it farther.

“If global and euro area growth weakens or the Fed begins to signal cuts, the ECB may need to follow suit and ease policy (partly to ward off EUR appreciation) and, therefore, would need to provide relief for banks through tiering,” Barclays economist Antonio Garcia Pascual wrote in a note to clients.

Draghi would not be drawn on that issue and said euro zone’s banks’ meager profits were mainly the results of high costs.

But he insisted the ECB had plenty of options, and appeared to validate market expectations for more action, rising since Reuters reported last month that staff at the central bank was looking into tiering.

Mario Draghi, President of the European Central Bank (ECB) holds a news conference on the outcome of the Governing Council meeting at the ECB headquarters in Frankfurt, Germany April 10, 2019. REUTERS/Kai Pfaffenbach

“We have shown we have plenty of instruments,” Draghi said. “The market reaction demonstrated that markets have fully understood our reaction function.”

TRUMP THREAT

In a further dent to global sentiment, U.S. President Donald Trump threatened on Tuesday to impose tariffs on $11 billion worth of European Union products, opening a new chapter in his global trade war.

“It certainly undermines general confidence,” Draghi said in response, adding that trade policy rhetoric did not always translate directly into sanctions.

For now the ECB stuck by its guidance, updated only last month, that interest rates would stay at current level at least until the end of the year, but Draghi stressed policymakers were ready to spring into action again if needed.

“(Wednesday’s) was a meeting the main goal of which was to reassert the readiness to act if the contingencies would warrant so,” Draghi said.

A survey of lending in the euro zone published on Tuesday tempered the need for urgent stimulus as banks said they expected business credit to grow and lending standards to ease this quarter.

Slideshow (2 Images)

And Draghi partly offset his caution over external demand with more hopeful comments about the domestic economy.

“The estimated probabilities of a (euro zone) recession remain low,” he said, adding that a weakening of inflation would “probably bottom” in September.

Writing by Mark John, Editing by Catherine Evans and John Stonestreet

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