ECB’s Draghi warns that uncertainty is weighing on sentiment

January 28, 2019

FRANKFURT (Reuters) – The euro zone economy has performed worse than expected in recent months and global uncertainty is weighing on economic sentiment, European Central Bank President Mario Draghi said on Monday, repeating the bank’s recent warnings about growth.

The ECB left policy on hold last week but warned that the bloc’s growth dip may be bigger and longer than earlier feared, pointing to even more protracted policy normalization and suggesting that the bank’s next step could be to provide more support, not less.

“Over the past few months, incoming information has continued to be weaker than expected on account of softer external demand and some country and sector-specific factors,” Draghi told the European Parliament’s committee on economic affairs in Brussels.

“The persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment,” Draghi added.

The ECB has long guided for steady interest rates ‘through’ the summer but markets have already scaled back their expectations, pricing in a move only in mid-2020, well after Draghi leaves office in October.

The problem is that the euro zone’s three biggest economies — Germany, France and Italy — are barely growing. Even if this is down mostly to one off factors, the resulting drop in business confidence threatens to make the downturn self fulfilling.

“Significant monetary policy stimulus remains essential to support the further build-up of domestic price pressures and headline inflation developments over the medium term,” Draghi added. “The Governing Council stands ready to adjust all of its instruments, as appropriate”

To prop up confidence, it could offer banks another round of cheap, long-term loans to make sure they continue to lend to the real economy.

The next move could be to formally push out the date of its first rate hike, a more tricky move as it could tie the hand of the new president, who is likely to named only after European elections in late May.

(Reporting by Balazs Koranyi; Editing by Alison Williams/Keith Weir)