ECB on high alert ahead of crucial Brexit summit

ECB policymakers are to gather in Frankfurt, before an evening meeting of EU leaders in Brussels decides whether to grant the UK a second delay to avoid Friday’s no-deal deadline.

Prime Minister Theresa May must present a credible plan for passing a deal through London’s fractious parliament to secure an extension from the EU, Brussels’ chief negotiator Michel Barnier said Tuesday.

In Frankfurt, the central bank fears a no-deal Brexit could spark tumult on financial markets and further undermine anaemic growth in the 19-nation eurozone.

A familiar string of other threats are also weighing on confidence and activity in the bloc, including US-China trade talks and Washington’s threat of harsh tariffs on European goods.

ECB president Mario Draghi “will reiterate his analysis of economic conditions and the risks weighing on growth,” predicted Frederik Ducrozet, a strategist at Pictet Wealth Management.

And given the clouds ahead, the top central banker is likely to underscore that the ECB has tools at its disposal to fight any additional fires, analysts said.

– Playing for time –

April’s ECB meeting was brought forward by a day to avoid clashing with an International Monetary Fund gathering.

The Washington-based IMF downgraded Tuesday its growth outlook for the eurozone, cutting its 2019 forecast to 1.3 percent — slightly higher than the ECB’s 1.1-percent estimate.

Germany and Italy account for much of the expected slowdown, with export-oriented Germany labouring under the effects of a slump in global trade and Italy expected to stagnate owing to high debt levels and muted domestic demand.

“Monetary policy should continue to remain accommodative” in the eurozone, and aim to lift inflation off present levels that are “well below target”, the IMF urged in its quarterly forecast.

Eurozone central bankers also slashed their price growth predictions last month, seeing inflation rising from just 1.2 percent this year to 1.6 percent in 2021 — still short of the ECB target of just below 2.0 percent.

However, “signs of a rebound are growing,” economist Ducrozet said, while the IMF also sees business activity picking up pace in 2020.

“The ECB has no reason to rush (with more supportive measures) but every reason to play for a little more time.”

– Help for banks –

Draghi looks set to reiterate his long-standing formulation that “an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation” to the bank’s target.

The Italian ECB chief will probably point to continuing reinvestments of the 2.6 trillion euros ($2.9 trillion) of government and corporate bonds that it bought under its “quantitative easing” programme between 2015 and 2018.

And Draghi will likely remind markets that the central bank’s “toolbox” of instruments to buttress growth is still at hand should the picture get uglier.

In March policymakers already decided on a new round of cheap loans to banks known as TLTROs, designed with a system of incentives to keep lenders funnelling cash into the wider economy.

But the ECB is likely to hold off presenting any details of the scheme until June, chief economist Peter Praet has said.

“If the economy continues to disappoint, the incentives (to borrow) could be more generous,” Nomura bank economist Marco Brancolini told AFP.

Policymakers are expected to continue a debate kicked off in March about whether to cushion banks against the impact of low interest rates on their bottom lines.

With the ECB’s deposit rate set at -0.4 percent, lenders pay the Frankfurt institution a total of around 7.5 billion euros per year to park extra cash there.

Observers have speculated the central bank could copy Switzerland by introducing a “tiering” system to charge only some deposits the harshest negative rate.

But sparing banks the worst effects could be read by markets as a sign that rates will remain lower for much longer than currently acknowledged — thus blurring ECB messaging about its overall policy.