Stimulus package ‘unlikely’ before stress tests says ECB

The European Central Bank is likely to refrain from any new stimulus package in coming months as it reviews lenders’ balance sheets, according to two euro-area central-bank officials familiar with current policy discussions.

The effect of any ECB measures could be blunted by the reluctance of banks to increase lending during the assessment, the people said, asking not to be identified because the deliberations aren’t public. The health check is scheduled to end in October. An ECB spokesman said that the Governing Council discusses its policy stance every month.

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ECB President Mario Draghi unveiled an historic package of policy measures this month, including a negative deposit rate and targeted long-term loans to banks, to fight the threat of deflation in the 18-nation currency bloc. He also said officials aren’t necessarily finished and may come up with additional stimulus if needed.

Policy makers could act again before the end of the bank review should a shock to the economy cause the inflation outlook to worsen, one of the central-bank officials said. The 24-member Governing Council doesn’t expect such a scenario, though asset purchases would be an option to address it, the person said.

The ECB spokesman declined to comment further on any potential stimulus measures. The euro rose on the news and traded at $1.3566 at 4:23 p.m. in Frankfurt, up 0.2 percent today.

“Shortly after announcing a multi-faceted package of policy measures, it is not a surprise that the central bank is reluctant to do more at this point,” said Ken Wattret, chief euro-area economist at BNP Paribas SA in London. If the ECB was to cut its “already very low” inflation forecast again, “then a Quantitative-Easing-style purchase programme would be a likely response,” he said.

The Frankfurt-based ECB is conducting its Comprehensive Assessment of lenders’ balance sheets before it becomes the euro-area bank supervisor on Nov. 4. An asset quality review is scheduled to end next month, to be followed by a stress test that runs into October.

The central bank will publish revised staff forecasts for inflation and gross domestic product at its September meeting. In June, it forecast inflation of 0.7 percent for this year, 1.1 percent in 2015 and 1.4 percent in 2016. That compares with the central bank’s target of just under 2 percent.

Also in September, the ECB will offer the first round of its targeted longer-term loans. The so-called TLTRO will provide a total of as much as 400 billion euros ($542 billion) to banks in two stages, on the condition that they lend the money on to companies and households. The second round will be held in December.

Draghi cut the benchmark interest rate to a record low of 0.15 percent and reduced the deposit rate to below zero on June 5, making the ECB the first major central bank to charge banks for parking excess cash. Policy makers also halted the sterilization of liquidity created by crisis-era bond purchases, and the ECB president said officials will intensify preparatory work on a program that could see the central bank buying asset-backed securities.

“Are we finished?” Draghi told reporters after the announcement. “The answer is no, we aren’t finished here. If need be, within our mandate, we aren’t finished here.”

To contact the reporter on this story: Stefan Riecher in Frankfurt at