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ECB unveils fresh moves to support eurozone economy

Rates would remain at historic lows at least till end-2019 and new rounds of cheap bank loans on tap


THE European Central Bank (ECB) on Thursday announced fresh measures to juice the slowing eurozone economy, saying interest rates would remain at historic lows at least until the end of 2019 and offering new rounds of cheap loans to banks to keep credit flowing.

Markets have long priced in "lower for longer" interest rates as there has been little sign of inflation perking up in the eurozone.

But the ECB's launch of new quarterly "targeted long-term refinancing operations" (TLTROs) for banks from September is an unexpectedly early move to counteract a euro area slowdown.

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The ECB now expects the region's economy to expand by just 1.1 per cent this year, down from 1.7 per cent previously.The downgrade is in line with equally gloomy projections from other institutions like the International Monetary Fund and the OECD in recent weeks.

Speaking at a news conference after the announcement, ECB president Mario Draghi said the governing council stands ready "to adjust all of its instruments as appropriate to ensure that inflation continues to move towards the council's inflation aim in a sustained manner".

He said the decision taken at the bank's policy meeting will support the further buildup of domestic price pressures and headline inflation developments over the medium term.

Geopolitical uncertainty, stuttering output in emerging markets and trade conflicts helped put the brakes on expansion in late-2018, alongside painful one-off effects like new emissions tests that have slowed the car industry.

The weak patch meant that just three months after ending a 2.6-trillion-euro (S$3.9 trillion) "quantitative easing" (QE) stimulus for the 19-nation eurozone in December, the ECB was under pressure to show it still had options to buttress growth.

"The measures, as such, are not a major surprise but the moment of the announcement is," economist Carsten Brzeski of ING Diba bank said.

"It is clearly an attempt to stay ahead of the curve" by preventing the work the ECB has done to loosen financial conditions in recent years from being undone, he added.

The ECB's renewal of its TLTRO scheme will allow banks to borrow from the ECB for periods of up to two years once per quarter between September 2019 and March 2021.

"These new operations will help to preserve favourable bank lending conditions and the smooth transmission of monetary policy," the ECB said.

Like previous rounds of TLTROs, the programme "will feature built-in incentives for credit conditions to remain favourable".

In the past, those incentives have included negative interest rates for banks showing they were lending more to firms and households - effectively meaning the ECB would pay them to borrow its cash.

The ECB has loaned banks more than 700 billion euros in previous TLTRO rounds.

The ECB's intervention comes at a moment when many had felt it was blocked from responding to the soft patch in growth after years of crisis firefighting.

The end of its massive bond-buying programme and rates fixed at historic lows gave the appearance of little room for manoeuvre.

Meanwhile, growth has slowed and both "soft" indicators such as business confidence and "hard" data like industrial production have fallen in recent months in the single currency area. AFP, REUTERS