Draghi Signals Bank-Loan Tool Is ECB’s First Defense to Slowdown

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Mario Draghi signaled that the European Central Bank expects to rely on long-term bank loans and tweaks to its negative interest-rate policy as a first defense if officials need to intensify their fight against the economic slowdown.

The comments came as the ECB president warned that euro-area growth has cooled further this year and could yet worsen. In a sign that hopes of a second-half rebound are fading, he said the weakness “will extend into the rest of the year.”

The long-term loan plan -- the third of its kind in the multi-year fight to reignite inflation -- was announced five weeks ago and will start in September, but the central bank has yet to decide on the terms. Draghi said officials will also analyze the side effects of negative interest rates to judge if they’re hurting the profitability of banks so much that they curb lending to companies and households.

While Draghi said the ECB is ready to use all its instruments if needed, the flagship policies of the past look unlikely to figure for now. The Governing Council hasn’t discussed cutting rates again -- the deposit rate was held at minus 0.4 percent -- and there was no suggestion of restarting bond purchases.

The ECB chief said it’s still “too early” to decide on negative rates or on the criteria for bank loans, and any decision would be taken at a “forthcoming meeting.” That suggests the next policy session in June, when the central bank will have new economic forecasts, could be the moment to act.

The latest assessment of the economy in Draghi’s statement was gloomy, driven by global risks including Donald Trump’s trade threats, Italy’s precarious fiscal situation and uncertainty over when and how the U.K. will leave the European Union. A day earlier, the IMF cut its forecasts for both the global and euro-area economies.

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On Brexit, as EU leaders gathered in Brussels for an emergency meeting at which they may force Britain to delay its departure from the bloc for as much as a year, he said the looming divorce is “part and parcel of the overall uncertainty that’s hanging over our continent.”

U.S. economic growth is also slowing, and the Federal Reserve is on what might be a prolonged pause in its tightening cycle. It’ll publish the minutes of its March meeting later on Wednesday.

“What the Governing Council did today was to assess the outlook, which is a
weakening picture, picture of weakening growth,” Draghi said. “The Governing Council stands ready to adjust all of its instruments, as appropriate.”

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