The European Central Bank in Frankfurt might be ready to resume low-cost loans to banks to boost economic growth (Yann Schreiber)

Frankfurt am Main (AFP) – Economists believe global headwinds will prompt the European Central Bank to lower growth and inflation forecasts Thursday, but the Frankfurt institution could also highlight ways of responding to the slowdown.

Expansion in the 19-nation eurozone slowed sharply in 2018 and is forecast to fall further this year, as geopolitical uncertainty, slowing growth in emerging markets and trade conflicts take their toll despite resilient domestic fundamentals.

ECB staff could cut their outlook for growth from the 1.7 percent predicted in December by 0.2 or 0.3 percentage points, analysts say.

That would leave the central bank slightly more optimistic than the European Commission but less sanguine than the International Monetary Fund (IMF), both of which have trimmed their expectations since the start of this year.

“Any revision which does not go lower than the current consensus of 1.4 percent is simply proof of the ECB’s sense of reality and no reason to panic,” ING DiBa bank economist Carsten Brzeski said.

Future growth is difficult to judge for now as “the eurozone still wobbles between decent domestic demand and increased external risks,” he added.

– Strong storms, strong foundations –

Both “soft” indicators such as business confidence and “hard” data like industrial production have fallen in recent months in the single currency area.

Trade conflicts between Washington, Brussels and Beijing, slowing growth in important export markets like China and looming uncertainty over Britain’s withdrawal from the European Union, or Brexit, have undermined confidence and slowed economic expansion.

ECB President Mario Draghi acknowledged in January that “risks surrounding the euro area growth outlook have moved to the downside” — but singled out such external factors as causes for the gloomier picture.

Domestically, unemployment held steady in February at 7.8 percent, its lowest level since 2008, the EU statistics authority Eurostat said last week.

And wages are rising in countries like Germany where shortages of skilled workers are making themselves felt.

But the stronger labour market has not had the expected impact of boosting inflation towards the ECB’s target of close to, but below 2.0 percent — the core of its mandate to secure price stability over the medium term.

Year-on-year price growth was just 1.5 percent in February and 1.4 percent in January, Eurostat said, with the “core” figure — ruling out volatile items like food, alcohol and energy  — even lower at 1.0 percent.

The ECB will likely further reduce its inflation outlook Thursday from December’s projections, which called for the rate to rise from 1.6 percent this year to 1.8 percent by 2021.

– Cheap loans to banks? –

Some observers see the ECB blocked from responding to the soft patch in growth after years of crisis firefighting.

In December it ended more than three years of mass “quantitative easing” purchases of government and corporate bonds, which ultimately amounted to 2.6 trillion euros ($3.0 trillion) — although it will for now replenish its stock as bonds mature.

Meanwhile interest rates are fixed at historic lows “at least through the summer of 2019” in its regular policy statements — leaving little room to stimulate the economy by traditional means.

The ECB’s governing council would be loath to restart bond purchases short of a major crisis.

And lowering rates still further is unrealistic, although the horizon for raising them could be pushed further into the future.

“We suspect that there is still no consensus on the next policy moves” among members, Capital Economics analyst Andrew Kenningham commented.

One option widely mooted in recent weeks — including by ECB board members — is a repeat of low-cost loans to banks known as targeted long-term refinancing operations (TLTROs).

Keeping banks well supplied with cash could prevent a slowdown in lending to the real economy which would in turn hinder growth and inflation.

Rather than take action immediately, the March meeting could see Draghi “tasking the relevant committees again to look into technical options, for new TLTROs to be unveiled in April and implemented in June,” Pictet bank economist Fredrik Ducrozet suggested.

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