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ECB Seen Giving Long-Term Loans in 2019, Going Slow on Rates

  • Economists expect loan announcement by March, issuance by June
  • Deposit rate now only forecast to rise to zero by March 2020

The European Central Bank will offer new long-term loans to banks next year while going slow on interest rates to underpin the region’s increasingly fragile upswing, according to a Bloomberg survey of economists.

Almost three-quarters of respondents said they expect an announcement of such funding by March, to be handed out three months later. A deposit-rate hike is still seen in September, but economists pushed back their estimate for when the rate will reach zero. The ECB’s Governing Council may give some clues on its plans after the next policy meeting on Dec. 13.

Rate Path

Economists see ECB raising borrowing costs gradually through 2020

“Geopolitical risks are enormous and there are already signs the global economy is set to slow,” said Alan McQuaid, chief economist at Cantor Fitzgerald in Dublin. “I’m not sure you’d want to tighten interest rates. And while new long-term loans will primarily address a funding cliff, they may turn out to be a welcome stimulus if the economy starts to get worse.”

Momentum in the 19-nation economy weakened markedly over the summer, and signs of a much-awaited rebound are scarce. Data on Friday showed German industrial production unexpectedly fell in October, though the nation’s third-quarter wage growth picked up and French output jumped.

Officials will publish updated growth and inflation projections after their meeting, though they’ve left little doubt that bond holdings will be capped at 2.6 trillion euros ($3 trillion) at the end of this month as planned.

Long-Term Loans

Majority of economists predicts ECB will offer fresh funds by March for June allotment

Existing four-year loans won’t start to expire until June 2020 but banks will begin to look for funding from the middle of next year to meet capital rules, and most economists predict as many as three operations. ECB chief economist Peter Praet has said it would be premature to take a decision now.

Risks to Euro-Area Economy

Global trade tensions are the single-biggest threat to outlook with Italy in second place

Respondents acknowledged that the risks to the economic outlook have increased, citing global trade spats and Italian politics as the biggest threats.

With that in mind, they pushed back their expectations for an update on ECB guidance. The majority now predicts an adjustment to that communication by June, three months later than previously. Some 53 percent expect more clarity on the commitment to keep interest rates at current lows “at least through the summer of 2019.”

WHAT OUR ECONOMISTS SAY:
“We expect the European Central Bank to lower its GDP forecasts, but strike an assured tone at the Dec. 13 meeting and press conference — it will want to prevent expectations of rate hikes from slipping further into the future.”

“We expect the ECB to change its rates guidance toward a data-dependent one during next summer,” said Rabobank’s Elwin de Groot. “Once the rate-hike trajectory has been initiated, we would expect more guidance as to its pace or timing in order to keep control over the yield curve.”

In their discussions on Wednesday and Thursday in Frankfurt, officials will likely focus on how to reinvest the proceeds of matured bonds. They were briefed by ECB staff last month on options, including whether to specify a time frame for the policy and whether to use the U.S. Federal Reserve’s strategy as a model.

Reinvestment Revamp

End of net asset purchases set to trigger changes in treatment of maturing debt

Respondents foresee three years of reinvestments, a year longer than before.

“We expect the ECB to announce, as the Fed did previously, that it will reduce reinvestment only after some interest-rate hikes,” said Michael Schubert at Commerzbank.

(Updates with German, French industrial output in fourth paragraph.)

By Piotr Skolimowski and Catarina Saraiva