* Rates to stay at current levels through H1 2020
* Rates cuts, more QE were discussed as contingency measures
* Best TLTRO rate 10 basis points over deposit rate
* New economic forecasts see slower 2020, 2021 (Adds more details, comments)By Balazs Koranyi and Francesco CanepaVILNIUS, June 6 (Reuters) - The European Central Bank onThursday ruled out raising interest rates in the next year andeven opened the door to cutting them or buying more bonds asrisk factors such as global trade war and Brexit drag the eurozone economy down.Hoping to maintain the flow of credit to the economy, italso offered to effectively pay banks to borrow from it and lendthat money on to the real economy.With the bloc's inflation prospects diminishing rapidly, ECBPresident Mario Draghi sought to reassure investors that thecentral bank was ready to act if needed to support an economyhurt by weaker global trade and that it could even resort toonce-taboo measures.He said policymakers had started to discuss options such ascuts to the ECB's already record-low rates, further pushing outthe timing of any hike or resuming a 2.6 trillion euro ($2.9trillion) bond-buying programme that only ended in December."Several members raised the possibility of further ratecuts. Other members raised the possibility of restarting theasset purchase programme or further extensions in the forwardguidance," Draghi said after a meeting of the ECB'spolicy-making Governing Council.The unexpectedly dovish stance comes as a trade war betweenthe United States and China overshadows the global economy andespecially export-oriented euro zone countries such as Germany.The euro and euro zone bond yields rose afterDraghi's comments, while bank shares and inflation expectationsfell as investors saw his hints at a rate cut as too timid. Notably, investors took the ECB's new message that rateswould "remain at their present levels at least through the firsthalf of 2020" as ruling out any cut until then. In March theBank had said rates would stay at record lows until at least theend of this year.TLTRO TERMSThe ECB said it would give banks credit at rates just 10basis points above its minus 0.4% deposit rate - paying them totake its money, in other words - provided they beat the ECB'slending benchmarks in a new targeted longer-term refinancingoperation, or TLTRO.With pervasive uncertainty already denting trade, bigcentral banks like the ECB and the U.S. Federal Reserve appearto have given up on plans to tighten policy, and markets are nowpositioned for easing.Although Draghi emphasized that the ECB's policy arsenal isfrom exhausted, analysts point out that its remaining tools lackthe potency of earlier measures.Rates are already at record lows, the bank's balance sheetis already bloated, and government bonds yields are depressed.Economists polled by Reuters expect rates to stay unchangedand forecast a first rate hike only in 2021. They also expectthe bank's next move to entail policy easing rather thantightening."With rates already at 0% and no fiscal levers to pull,options are somewhat limited. Turning the QE taps back on by theend of the year is an increasingly probable scenario," saidNancy Curtin, Chief Investment Officer at Close Brothers AssetManagement.Draghi himself said central banks and the markets have beennavigating troubled waters for years, and may continue to do so."Now we say that monetary policy is non-conventional and weare far away from normalisation because the rest of the world,the rest of the challenges, are far away from being normalised,"he said."It's been like that now for many, many, many yearsfollowing first the financial crisis, then the sovereign debtcrisis, then the Greek crisis. And now we have the threat ofrising protectionism, the geopolitical dangers that we have seen... We have developments in the euro zone itself."
RISKSHe also said risks to the economy were tilted to thedownside.The central bank revised up its growth projection for thisyear to 1.2% but cut them to 1.4% for both 2020 and 2021.Inflation forecasts were also tweaked at Philip Lane's firstpolicy meeting as ECB Chief Economist. Prices are now seenrising 1.3% this year, 1.4% next year and 1.6% in 2021. With the ECB officially targeting an inflation rate of justbelow 2%, it still has some way to climb, however. Inflation hasundershot this since 2013 and projections suggest it willcontinue to miss it for years to come.
The ECB's problem is the global trade war shows no sign ofde-escalating, Italy is once again in conflict with the EuropeanCommission, German industry continues to post dismal figures,stock markets are tumbling and a hard Brexit is threatened.And on top of that, inflation expectations, the ECB's topworry, are steadily declining, raising the risk they becomedislodged, thereby perpetuating weak price growth. Draghi saidhe saw no probability of deflation, however, and a lowprobability of recession."There is no probability of deflation, there is very lowprobability of recession, there are no threats of de-anchoringof inflation expectations," he said.The ECB's favoured gauge of market inflation expectationshad earlier fallen to its lowest since 2016 while money marketpricing showed investors see almost a 70% chance of a 10 basispoint cut in ECB rates by the end of the year. "Let's be clear, another change to forward guidance is justanother step to align the ECB's forward guidance with marketexpectations; not the other way around," said Carsten Brzeski,chief economist, ING Germany. (Additional reporting by Andrius Sytas; Writing by JonathanCable; Editing by Catherine Evans and Hugh Lawson)
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