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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Trump hits out as ECB launches new stimulus programme to fight recession - as it happened

Press Play to watch Mario Draghi’s press conference

Summary

Time for a recap:

Europe’s top central banker has swapped barbs with the President of the United States after announcing a new stimulus package designed to prevent the eurozone sliding into recession.

At one of his last meetings as ECB president, Mario Draghi unveiled a package of measures to ease monetary policy in the euro area.

The Bank:

  • Cut one of its key interest rates, the one charged on bank deposits at the ECB, to -0.5% to encourage lending
  • Left its headline borrowing rate at zero, but pledged to leave them alone indefinitely, until inflation has robustly risen
  • Agreed to restart its quantitative easing programme in November, with €20bn of bond purchases each month
  • Made its offer of cheap loans to banks more profitable

The ECB also slashed its growth and inflation forecasts, as it warned that economic conditions have deteriorated.

New ECB forecasts

Draghi claimed there was broad support for his plan -- however, there are reports tonight that several members of the governing council opposed restarting QE.

The ECB president also warned that the risks of a eurozone recession has risen, with many economists believe Germany’s economy is already shrinking.

The move met an almost immediate response from the White House, where Donald Trump has been lobbying America’s central bank to cut interest rates.

Controversially, Trump claimed the ECB was deliberately weakening the euro to help companies sell goods overseas:

This prompted a swift rebuttal from Draghi, who insisted that he was simply following his mandate.

We have a mandate. We pursue price stability and we don’t target exchange rates. Period.

He also warned America that G20 countries have a commitment not to indulge in currency depreciations.

Draghi spent much of his press conference dropping non-too-subtle hints that European governments should rip up their deficit targets and borrow more, to encourage growth.

At one point he seemed to hint that monetary policy has gone lost as far as it can:

Almost all the things that you see in Europe, the creation of more than 11 million jobs in a short period of time, the recovery, the sustained growth for several quarters, were by and large produced by our monetary policy. There was very little else… Now it’s high time for the fiscal policy to take charge.”

Economists broadly welcomed the package, while warning that it has its limits.

As Florian Hense of Berenberg Bank put it:

Will the ECB package make a major difference? Probably not. The impact of further easing on business and household spending is likely to be very small. In a situation that is almost akin to a liquidity trap, ever more negative rates comes close to pushing on a string. Nonetheless, further easing can still help to contain the downside risks. First, the ECB can prevent market turbulence which could potentially exacerbate the drag on the real economy from the challenging environment of trade wars, Brexit and the Chinese slowdown. Second, by lowering funding costs further, it can make it easier for governments to finance a modest fiscal expansion and nudge countries with some extra fiscal space to actually use it – think Germany.

Relative to previous net asset purchases of €60bn or even €80bn per month, the ECB’s new open-ended purchase programme looks modest. On their own, purchases of €240bn in one year will raise the balance sheet of the Eurosystem by c2ppt of GDP in a year from its current level of close to 40%.

Although Draghi is not leaving before November, today’s meeting will be remembered as his major final act. Given the bigger-than-usual divisions within the Governing Council, Draghi probably had to go all in to sway (most of) his colleagues to play largely the melody he had set out at the ECB’s annual gathering in Sintra in early June.

BBG: Several ECB policymakers opposed more QE

Newsflash: Bloomberg is reporting that several members of the ECB governing council opposed parts of today’s stimulus programme.

That includes some of Europe’s largest economies - Germany, France and the Netherlands, along with Estonia and Austria.

I mentioned earlier that Draghi seemed reluctant to reveal the mood at today’s meeting, joking that the committee were unanimous in believing fiscal policy has a bigger role to play.

Clearly they were not unanimous about cranking up the money-printing machine again.

Markets rally after ECB stimulus move

After fluctuating through the afternoon, European stock markets have closed at their highest levels in six weeks.

Investors are welcoming the ECB’s new stimulus package, while also aware that monetary policy alone won’t save the world economy (which is why Draghi is pushing for government’s to step up).

European stock market close
European stock market close Photograph: Refinitiv

Christopher Smart, Chief Global Strategist & Head of the Barings Investment Institute, says:

“Markets are cornering central banks into this new round of cuts. The ECB really had very little choice today and the Fed’s next cuts are more or less pre-determined, too.

“Does it help? Of course, it helps. Is it enough? Almost certainly not. The real drag on economic growth comes from a natural slowing at this stage in the cycle and uncertainty over trade.

“The cycle could easily be extended with a meaningful fiscal response. Germany and South Korea have leeway to spend more, and at current low interest rates even the United States could borrow and invest more.

“As for trade, tariff risks mean that companies don’t know where they should build their next plants or how to organize their supply chains. A narrower deal like the one Beijing seems to be talking about today may help avoid the next round of tariff hikes, but it won’t address the fundamental uncertainty that delays capital spending.”

One of the most complicated parts of the ECB’s stimulus is the changes to its TLTRO programme -- cheap long-term loans for commercial banks.

Fortunately Tom Kinmonth, fixed income strategist at ABN Amro, has analysed the changes, and concluded that they are rather more attractive for commercial banks.

He told clients (in a note online here):

  • Banks can now borrow at a far better rate from the ECB
  • TLTRO conditions greatly improved, allowing all eurozone banks to benefit
  • The new tiering system offers €2bn of savings for eurozone banks…
  • …and some periphery banks will receive 0% on all their deposits

Kinmonth explains:

Under TLTRO III, banks can soon take loans from the ECB for three years at a rate as low of -0.5%, if they meet specific loan lending criteria. The ECB will pay banks to take money. The new modalities are considerably better than the originally planned conditions which were 2 years at +0.1%...

That means banks are getting some protection, to make up for the pain of negative rates for leaving cash at the ECB:

Under the original rules of the TLTRO III programme hardly banks would have stood to significantly benefit when considering the current market conditions. Whereas, under the new programme’s conditions every bank in Europe stands to benefit in regard to funding costs.

As such, the change today in the modalities of thus ECB programme is a credit positive for the European banking sector. Banks will breathe a sigh of relief on this matter.

Mario Draghi, President of the European Central Bank, preparing to answer a reporter’s question following a meeting of the ECB governing board on September 12, 2019 in Frankfurt.
Mario Draghi, President of the European Central Bank, preparing to answer a reporter’s question following a meeting of the ECB governing board on September 12, 2019 in Frankfurt. Photograph: Sean Gallup/Getty Images

The ECB has now uploaded Mario Draghi’s statement, online here.

It explains the decision to relaunch its QE programme, hit banks with more negative deposit rates for leaving cash at the ECB, and make a more dovish commitment to leave borrowing costs low.

It includes with Draghi’s usual demand for structural reforms, and increased higher government spending where possible:

In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space should act in an effective and timely manner.

Melanie Baker, senior economist at Royal London Asset Management, believes the ECB’s package (a rate cut, more QE and sweetened loans for banks) will boost Europe’s economy.

She writes:

“The easing measures from the ECB today were welcome news for global growth prospects. By going for a package, rather than piecemeal measures, and a more open-ended form of QE, there is a better chance that there will ultimately be a visible positive impact on the euro area economy, both in terms of growth and inflation outcomes.

But, policymakers such as Mario Draghi are fighting the damage caused by Donald Trump’s trade wars:

In general, we still see the global outlook as something of a tug-of-war between stimulus and trade tensions. More fiscal stimulus would help, as will a likely Fed rate cut next week. But higher tariffs, persistent trade tensions and high levels of trade-related uncertainty for businesses remain key concerns.”

The decision to restart the ECB’s stimulus programme shows Europe’s economy is deteriorating, says Ediz Fahri, senior economist at data firm Dun & Bradstreet.

The ECB has just announced its decision to restart its asset purchase programme (APP) this November, in which €20bn of bonds are set to be purchased each month.

Meanwhile, Mario Draghi’s decision to lower the deposit rate for the first time since March 2016, signals towards the ECB’s efforts to kickstart the euro area’s growth engine and bring inflation back closer to the 2.0% target.

The euro zone’s latest monetary decisions highlights the rising macroeconomic and political risks across the region and affirms our most recent global economic outlook trend downgrade, shifting from ‘stable’ to ‘deteriorating’ in September.

Mario Draghi was correct to call for more eurozone government spending, argues Ken Wattret, chief European economist at IHS Markit.

But the call may not be needed until Europe’s economy is in real trouble, he fears....

The need for fiscal policy to complement monetary policy accommodation again featured more prominently [at today’s ECB press conference].

Draghi called for “effective, timely” action from member states which have fiscal space. Christine Lagarde is on the same page clearly. The likelihood of fiscal stimulus is clearly increasing, including from Germany, which is already in recession (bar the confirmation from Q3 GDP).

But in time honoured fashion, the government in Germany is going to wait until the situation has deteriorated even further before taking action and even then, the timeline is likely to be elongated.

Updated

Full story: With eurozone weakening, ECB boosts stimulus

My colleague Richard Partington has filed a news story, explaining what the ECB has done today, and why:

The European Central Bank has announced a fresh stimulus package in an attempt to prevent the fragile eurozone economy from grinding to a halt, with an interest rate cut and plans to pump €20bn (£19bn) a month into the financial markets.

In one of the final acts of Mario Draghi’s presidency before Christine Lagardetakes charge of the ECB in November, the central bank said it would reboot its quantitative easing (QE) programme of bond-buying programme in that same month.

The ECB will also cut its deposit rate – the interest paid to commercial banks when they place funds with the central bank – by 0.1 percentage points to a new all-time low of -0.5%, meaning banks incur charges on any balances they keep there. Negative interest rates are meant to encourage banks to lend to consumers and businesses, rather than park their money with the ECB.

The stimulus package comes as the eurozone economy falters alongside a broader global economic slowdown that has been triggered by rising trade protectionism and the US-China trade war.

More here:

ING’s chief economist, Carsten Brzeski, reckons the European Central Bank is getting worried:

As expected, the ECB has become more alarmed about the outlook for the economy and inflation. As Draghi said during the press conference, the base case scenario was still a benign scenario as it didn’t include the risk of a no-deal Brexit and trade wars.

Nevertheless, the ECB staff projections presented downward revisions to both growth and inflation (as covered here).”

Updated

Mike Bell, global market strategist at J.P. Morgan Asset Management, believes European leaders should heed Draghi’s advice.

He also thinks the ECB is trying to keep the euro weak - exactly what president Trump is so cross about.

Bell says:

“The ECB have played their hand and Draghi has gone out with a bang. The ball now rests firmly in the court of those European governments with the fiscal capacity to join in the easing game.

The ECB have certainly got ahead of the pack in an ambitious effort to keep the currency low in the face of potential further stimulus from foreign central banks.

Lukman Otunuga, senior research analyst at FXTM, says Mario Draghi has made one last push to stimulate the eurozone - before he leaves the European Central Bank next month.

But, he also believes more measure may be required, given the weakness of Europe’s economy.

Although Draghi has done “whatever it takes” before he hands the mantle over to Christine Lagarde, it seems markets are disappointed with the ECB’s actions. Given the concerns revolving around the health of the Eurozone economy, most were expecting Draghi to launch a monetary policy bazooka before his departure.

However, the argument for the ECB saving some ammunition in the monetary policy toolbox could be for when economic conditions worsen. It is worth keeping in mind that the Eurozone is not only dealing with developments at home, but risks in the form of Brexit and Trump imposing tariffs on European goods. With the ECB cutting its growth forecasts for 2019 and 2020, there is potential for further easing down the line should global and domestic economic conditions deteriorate further.

The Euro collapsed like a house of cards following the rate decision with prices crashing towards $1.0930 against the Dollar before later recovering over $1.1000. Further weakness may be on the cards in the near term as investors digest the ECB’s action and prospects of further easing in the future.

Updated

Analyst Arne Petimezas of AFS Group is disappointed that the ECB hasn’t announced a larger package today.

Ronald Temple, co-head of multi asset at Lazard Asset Management, says Mario Draghi is quite right to call for higher government spending:

“Today the ECB used more of its dwindling ammunition to try to stimulate growth. Draghi rightly emphasized the imperative of fiscal stimulus and structural reforms. Unfortunately, Eurozone governments have failed to deliver on this count for a decade now, in spite of ever lower financing costs.

The ECB has done its job; now it’s time for the governments to step up.”

Never play the Forex, folks.

After plunging earlier, the euro has now bounced back and is up around 0.15% against the US dollar today.

Economists are chewing through the technical details of the ECB’s stimulus programme now.

Fred Ducrozet of Pictet Bank reckons some parts are actually ‘less generous’ than first thought, such as the ‘tiering system’ that will protect euro banks from more punishing negative rates.

Q: If governments don’t heed your advice to boost spending, will the ECB be forced to resort to helicopter money?

Mario Draghi says the governing council hasn’t discussed helicopter money [literally giving cash away to citizens].

It could be part of our strategic review in future, he adds (that will be conducted by his successor, Christine Lagarde).

And Draghi wraps up with another nudge to European politicians, saying:

Giving money to people is a fiscal policy task, not a monetary policy task.

That’s the end of the press conference -- I”ll post a summary and reaction now.

Q: What about criticism from politicians and bankers about negative interest rates?

Negative interest rates are a necessity to help us meet our mandate, Mario Draghi replies firmly.

He adds that 11 million jobs created in recent years, and insists that German citizens have benefitted from the ECB’s stimulus measures [even though savers have been hit with lower interest rates].

Banks don’t like negative rates, but they won’t cause the collapse of the financial system, the president adds (well that’s a relief!). Banks should focus on improving their own costs, he adds.

Eurozone bonds prices are surging, as investors react to the ECB’s pledge to buy €20bn of new debt each month.

This has driven yields (or interest rate on the bonds) down.

Germany’s 30-year bond is now trading at a negative yield again - meaning Berlin can effectively borrow for free!

That sounds like the perfect time to boost government spending, despite the German government’s reluctance to run a deficit.

Draghi: German government should spend more to fight recession

Mario Draghi, President of the European Central Bank (ECB), arriving for today’s press conference following a meeting of the Governing Council of the European Central Bank, in Frankfurt am Main, Germany.
Mario Draghi, President of the European Central Bank (ECB), arriving for today’s press conference following a meeting of the Governing Council of the European Central Bank, in Frankfurt am Main, Germany. Photograph: Ronald Wittek/EPA

Q: Are you worried that Germany is in recession?

A eurozone-wide recession is a “small probability”, Mario Draghi replies, but this probability has risen recently.

And on Germany, he points out that several institutes have warned that Europe’s largest economy is already in recession [such as IFO this morning] or going into recession.

This is a case for “timely and effective action” on the fiscal side, Draghi replies. That’s a very significant move -- an unelected central banker is basically telling Angela Merkel to raise government spending.

He adds that central bankers need to be very humble when giving such advice!

Q: Are people right to be concerned about the negative side effects of QE and record low interest rates?

Draghi replies that the ECB is aware of the side effects of our monetary policy and we are closely monitoring all these effects.

Q: What would the ECB do if America deliberately weakened the dollar?

Draghi says that all G20 members are expected to abide by a consensus not to engage in “competitive devaluations” (currency wars).

Allianz’s chief economist, Mohamed El-Erian, points out that the ECB has certainly weakened the euro - even though Draghi denies it is deliberate.

Draghi rejects Trump's criticism

Q: What do you think about Donald Trump’s tweet?

ECB president Draghi steps forward and sweeps the president’s attack aside.

We have a mandate. We pursue price stability and we don’t target exchange rates. Period.

More reaction:

Mario Draghi is doubling down on his call for governments to raise their spending.

If fiscal policy was more effective then our stimulus policies would work better, with less negative side effects, he says.

Draghi: Fiscal policy needs to take over

Onto questions....

Q: What was the mood like at today’s meeting, as several members of the governing council had opposed restarting QE? (including the German and Dutch central bank chiefs).

Draghi embarks on a long explanation. He says the eurozone had slowed more than expected since June (when he gave a speech hinting at fresh stimulus). He also points to the lower inflation forecasts.

These, and the “persistence of downside risks”, were factors behind today’s decision, he says.

Draghi also points out that the ECB’s base forecasts don’t include a hard Brexit, even though it has become more likely recently, or a deeper trade war.

He’s now picking out phrases from the ECB’s statement - including the commitment not to raise interest rates until inflation is ‘robustly’ back on target.

But he can’t put off the answer for ever....

Draghi says: There was unanimity....that fiscal policy should become the main tool (triggering chortles in the press room).

That feels significant -- the ECB is saying that politicians can’t rely on central bankers any more.

What we want to know, though, is whether the hawkish members of the governing council were unanimously behind Draghi.

And on that, the president say:

The consensus was so broad that we didn’t take a vote.

#hmmm

Draghi ends his statement by calling on governments to raise spending, where possible, to give the eurozone a fiscal boost.

Shares are rising across Europe, as equities benefit from the ECB’s latest stimulus plans.

The French and German markets are both up 0.5%, pushing the EU-wide Stoxx 600 index to its highest level since late July.

The euro is continuing to fall as Draghi speaks, which will NOT please president Trump.

It’s now lost three-quarters of a cent, dropping to $1.0927. That’s very close to the two-year low hit last week.

The ECB has also cut its inflation forecasts.

Draghi blames the lower oil price, and “global trade issues” [a jibe to Donald Trump?!]

The ECB has cut its growth forecasts for 2019 and 2020.

It now expects GDP to rise by 1.1% this year, down from 1.2%. In 2020, growth is seen picking up to 1.2%, not the 1.4% previously expected.

President Draghi singles out the US-China trade war as a key cause of Europe’s problems.

He says that global trade tensions are hurting the eurozone -- particularly its factories (as we saw this morning, when output slumped by 0.4% in July).

Draghi: It's a comprehensive package

Draghi confirms that the ECB has cut its deposit rate (for commercial bank deposits) to minus 0.5%, and will keep interest rates at record lows indefinitely, until inflation has robustly picked up.

He also outlines the changes to the TLTRO loans programme, to make them more attractive to banks (as summarised here).

He then insists that today’s “comprehensive package of monetary policy decisions” will provide the firepower needed to ensure that financial conditions remain “very favourable”.

He points to the “continued shortfall of inflation”, and adds that incoming information suggest the eurozone economy is suffering “a more protracted weakness” than previously thought.

ECB press conference begins

ECB president Mario Draghi is about to explain why he and his colleagues have decided to launch a new stimulus programme. You can watch it live here.

I’ve embedded it at the top of this blog too (you might need to refresh to see it).

Updated

Trump’s latest blast comes a day after he accused the US Federal Reserve of being “boneheads” for keeping interest rates too high.....

ECB stimulus, the key points

Here’s a handy reminder of the European Central Bank’s new stimulus programme, from ING.

  • Deposit rate cut by 10 basis point to -0.5%.
  • A tiering system will be introduced.
  • Forward guidance on rates is no longer calendar based but open-ended and state-dependent.
  • QE will be restarted with €20bn per month, starting 1 November. There is no end date added to QE.
  • The TLTROs will be repriced and include an incentive for banks to increase lending. Along the lines of the first two generations of TLTROs, banks which exceed the benchmark ECB loans will be charged at the deposit rate.

Trump: ECB is weakening the euro while Fed sits and sits

Newsflash: US president Donald Trump has reacted, accusing the European Central Bank of fighting a currency war.

In a sharply worded tweet, Trump says the ECB is is depreciating the euro - at the expense of US exporters.

Once again, he’s criticising the US Federal Reserve for not cutting its interest rates [US headline borrowing costs are currently 2.25%, compared to 0% in the eurozone].

Trump is correct on his last point. French and German 10-year bonds are both trading at negative yields, while US Treasury bills trade at around 1.7% per year.

But that also reflects the fact America’s economy is growing rather faster than the eurozone.

Updated

ING’s Carsten Brzeski says this is Mario Draghi’s final “Whatever it takes” moment (a tribute to his successful pledge to protect the euro in 2012).

He writes:

The final showdown has started with a big bang. The ECB just announced a big policy package to revive the Eurozone economy and to bring inflation back to target....

This is Mario Draghi’s final “whatever it takes”. Depsite all market excitement now, the question remains whether this will be enough to get growth and inflation back on track as the real elephant in the room is fiscal policy. It is clear that without fiscal stimulus, Draghi’s final stunt will not necessarily lead to a happy end.

Marchel Alexandrovich, Senior European Economist, Jefferies, says the ECB has unleashed an “aggressive package of easing measures”

The depo rate [has been] cut by 10bp, forward guidance extended, a new indefinite €20bn per month programme of QE, improved TLTRO terms and a tiered system for bank deposits.

ECB stimulus: What the experts say

Financial experts are scrambling to react to today’s package of measures from the European Central Bank.

Dr Julia Coronado of MacroPolicy Perspectives is impressed that the ECB has torn up its old forward guidance on interest rates.

It is now promising to keep borrowing costs at record lows until inflation has converged “robustly” to its target of just below 2%.

Previously, it had set a date of “at least the first half of 2020” - but that calendar guidance has been ditched.

Mike Larson of Weiss Ratings says the ECB is trying to protect banks from the harm caused by negative interest rates (even as it hits them with even deeper negative rates!)

Lena Komileva of G+ Economics says Draghi is ending his eight-year term at the ECB as he began it -- with a major new package of measures.

[Draghi steps down on 31 October -- the day before this new QE programme will begin].

ECB sweetens its TLTRO programme.

Another important move: The ECB is making its TLTRO programme of long-term loans to commercial banks more attractive.

Banks whose lending crosses a certain benchmark will receive a more generous interest rate on their loan. Significantly, it could be as low as the ECB’s own deposit rate -- which has just been lowered to -o.5%.

The ECB says:

For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III operations will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation. The maturity of the operations will be extended from two to three years.

That will make the TLTRO programme more attractive -- and compensate the banks for the impact of negative interest rates.

TLTRO was originally introduced during the eurozone crisis. It gives commercial banks access to very cheap finance from the ECB, in a bid to push up commercial lending.

Euro drops after stimulus announced

The euro has fallen to its lowest level in more than a week.

It’s down half a cent against the US dollar at $1.0957, as traders react to this new stimulus package.

The ECB’s statement is online, here: Monetary policy decisions

Financial news service RANsquawk have helpfully highlighted all the changes:

Deeper negative interest rates are bad news for Europe’s banks. They mean even bigger losses for leaving bank deposits overnight with the ECB.

But the ECB has got some good news for them. It will introduce a new “two-tiered” system, under which some banks’ holdings are exempt from the negative deposit facility rate.

The ECB’s Governing Council is pledging to keep rolling over its existing quantitative easing programme too -- another attempt to stimulate the eurozone’s sickly economy.

It says:

Reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The ECB is also pledging to leave its interest rates at their current record lows, or even lower, until inflation has picked up.

It says:

The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

ECB RESTARTS STIMULUS

BREAKING: The European Central Bank has announced a new stimulus package, in an attempt to boost growth in the eurozone.

It is cutting its deposit rate -- charged on commercial bank deposits at the ECB -- to a new all-time low of minus 0.5%. It was previously -0.4%.

That’s meant to encourage banks to lend to consumers and businesses.

The ECB’s governing council has also decided to leave its benchmark interest rate at zero percent -- rather than imposing negative rates on savers.

The ECB is also restarting its quantitative easing programme, and will start buying €20bn of bonds each month from the start of November.

More to follow!

Updated

Here’s the latest buzz....with just a few minutes to go.

This morning’s weak factory output figures should worry the ECB, says Sven Schulte-Hillen, acquisition and finance partner at Pinsent Masons.

But... lowering interest rates and boosting QE may not be enough to help.

He says:

“The decline in production clearly demonstrates that the EU is facing downward economic pressure. I’m confident many across Germany will be encouraged by the ECB attempting to tackle this early and halt a recession. However, many will question how effective the ECB means will be.

Lowering interest rates will of course increase pressure on the banks to kick-start lending, lower the value of the Euro and give the EU a currency boost. But as Germany grapples with macro-economic and political hurdles, such as a possible no-deal Brexit and Trump’s trade war, interest rates are not the only mechanism that need to be adjusted.”

Just 15 minutes to go! So here’s a reminder of what the ECB could announce.....

Just in: Turkey’s central bank has slashed interest rates dramatically -- but not by as much as some traders expected.

The Central Bank of Turkey has cut its benchmark interest rate from 19.75% to 16.5%, a cut of 325 basis points.

This is the second major rate cut from central bank governor Murat Uysal since he took over in July. That will please president Erdoğan, who has long argued that high interest rate create inflation (not a view shared by many conventional economists...).

Surprisingly, the Turkish lira is strengthening -- showing that traders had expected an even deeper rate cut.

Perhaps significantly, the CBRT has also said that the “inflation outlook continued to improve”.

In addition to the stable course of the Turkish lira, improvement in inflation expectations and mild domestic demand conditions supported the disinflation in core indicators.

The ECB has made its decision!

Members of the governing council have been spotted leaving their headquarters in Frankfurt. That means we’ve not got long to wait......

Critics of the European Central Bank will question whether a new bond-buying programme will really work.

The ECB has already swelled its balance sheet by over €2.6 trillion, as it snapped up huge amounts of eurozone debt with newly created money. At one stage it was buying €80bn of assets every month.

Mario Draghi insists QE made a difference -- arguing that unemployment would have been rather higher otherwise.

But while QE has also driven up asset prices, it doesn’t seem to have achieved a key objective - lifting inflation.

As these tweets show, inflation expectations are still rather low, which will concern the ECB’s governing council.

ECB meeting: What's expected

Excitement is building in the markets as investors anticipate today’s monetary policy decision from the European Central Bank, in under an hour.

Some form of stimulus package feels inevitable - unless the ECB wants to crush market expectations and trigger a whopping sell-off. But what form will it take?

ABN Amro believes Mario Draghi will get his big bazooka out, and announce a wide-ranging package of measures.

They includes

  • Rate cuts. They expect the ECB to cut all its policy rates by 10bp at the September meeting, followed by another 10bp step at the December meeting.

  • Mitigating measures . A new tiered deposit rate system would protect banks from some of the negative impact of negative interest rates (which crush the profit margin between lending rates and retail deposit rates).

    The EBC could also make its TLTRO loans programme more profitable for banks.

  • Net asset purchases. ABN AMRO expect the ECB to announce a €70bn per month QE bond-buying programme running for a year from October 2019 onwards. Other economists expect a rather smaller programme, though.

    The ECB could also pledge to buy more corporate bonds, and debt issued by European agencies and regional bodies.

  • Forward guidance. The ECB could give a new, more dovish, commitment to keep interest rates at record lows for longer.

Nick Kounis, head of financial market research at ABN Amro, says:

We expect a package of monetary stimulus from the ECB on Thursday.

Given the pullback in ECB stimulus expectations over recent days, we think there is considerable room for a market surprise on the size of net asset purchases, which will push yields lower, curves flatter and sovereign and credit spreads tighter.

The disappointing drop in eurozone factory output in July shows that Europe’s economy struggled over the summer.

Worryingly, industrial production has been dropping on a year-on-year basis through 2019.

As Bloomberg puts it:

The euro region’s industrial woes persisted at the start of the third quarter as a German factory slump dragged down output more than economists predicted.

Production fell 0.4% in July, deepening a decline from the previous month. The drop was led by Germany, Europe’s biggest economy, which is suffering the most in the region as a global slowdown in trade hurts its exporters.

Eurozone factory output falls faster than expected

More gloom! Eurozone factory output contracted by 0.4% in July, new figures show.

That’s worse than the 0.1% decline expected, and shows that Europe’s manufacturers is still struggling.

On an annual basis, eurozone factory output was 2% lower than in July 2018.

Eurostat, which compiles the data, says that Estonia, Germany and Romania suffered the biggest declines in factory output -- all down at least 5% year-on-year.

It adds that, over the last year:

Production of capital goods fell by 3.4%, intermediate goods by 3.0% and energy by 1.4%, while production of non-durable consumer goods rose by 1.5% and durable consumer goods by 1.8%

City trading group BP Prime says it’s another recession warning:

IFO: No-deal Brexit and trade war would hurt Germany

The German recession would be much more painful if Britain crashed out of the EU without a deal, IFO adds.

A deeper US-China trade war would also drive GDP deeper down, it adds:

Even if their concrete economic consequences are difficult to calculate - because they lack historical experience - they would certainly deepen and prolong the recessionary tendencies in the German economy.

IFO is also worried that German employers are cutting staff -- a classic sign of a recession.

Its new economic forecast says:

While employment in the manufacturing sector has been falling since the spring, so far the strong growth in private service providers and in the construction industry has come to a standstill in the summer.

Unemployment is already rising for the fourth month in a row and the proportion of companies have announced the short-time working, has increased significantly.

Germany falling into recession, warns IFO

The flag of Germany.

Ouch! Germany’s economy will fall into recession this quarter, according to new gloomy forecasts from the Munich-based IFO thinktank.

IFO has predicted that German GDP will fall by 0.1% in July-September, for the second quarter in a row. That would put Europe’s largest economy into a technical recession.

IFO also cut its growth forecast for 2019 to just 0.5%, from a barely-better 0.6%. That should concentrate minds at the ECB, as policymakers debate whether to restart their stimulus programme today.

IFO’s Timo Wollmershaeuser fears that the slump in German industry (particularly its car sector) is spreading across the economy, warning that:

“The outlook is weighed down by high uncertainties.”

IFO hopes that Germany will return to growth in the fourth quarter of 2019. However, this forecast is based on the UK avoiding a no-deal Brexit, and no further escalation of the US-China trade war.

And even then, IFO only expects Germany to grow by 1.2% in 2020, down from 1.7% previously.

Markets lifted by tariff delay and ECB hopes

European stock markets have hit their highest levels in six weeks.

Traders are welcoming Donald Trump’s decision to delay China’s tariffs, and also hopeful that the ECB will announce a chunky stimulus package this lunchtime.

European stock markets, 12 September 2019
European stock markets, 12 September 2019 Photograph: Refinitiv

Co-op: Fresh food shortages after no-deal Brexit

Update: The Co-op has also revealed that it is stockpiling water and toilet paper ahead of Brexit.

Speaking to reporters now, the company also warns there could be some shortages of some fresh food in the event of No-Deal, and that retailers may need to use more air freight services to get fruit and flowers into the UK.

Beijing has welcomed Donald Trump’s decision to delay raising tariffs on Chinese imports for a fortnight (see earlier post).

The Commerce Ministry says it is a welcome goodwill gesture, and that China hopes that both sides will create “favourable conditions for talks”.

Spokesman Gao Feng added that China will roll out “supportive measures” soon, to mitigate the trade war.

A combine harvester in a field.
A combine harvester in a field. Photograph: Owen Humphreys/PA

The Co-operative Group are also worried about Brexit.

It warned this morning that UK farmers could suffer badly if Britain leaves the EU in a disorderly way.

In its latest results, the Co-op says:

Like all big businesses, we’ve continued with our Brexit planning since the end of March and we know we need to be ready for all eventualities. If a negotiated withdrawal from the EU doesn’t take place at the end of October, we expect some disruption to our supply chain, at least in the short term, and we’ll do our best to protect our members from any inconvenience. We’re particularly concerned about what a no-deal Brexit will mean for the British farmers whose produce we’ve championed over the last few years.

We’re also mindful of how Brexit has exposed deep divisions within our communities with strong feelings of disempowerment and neglect expressed by many. These are serious matters that an economic resolution to Brexit will only partially address.

UK lamb farmers, for example, could suffer badly if new tariffs were imposed on sales to Europe [one report suggests WTO tariffs could raise the price of British sheep meat for EU buyers by between 38% and 91%]

The Operation Yellowhammer documents released last night showed that a No-Deal Brexit could cause rising food and fuel prices and disruption at the border. That could hurt Britain’s agriculture industry, if farmers can’t access key raw materials or get their produce abroad.

Updated

John Lewis's Brexit warning as profits vanish

The John Lewis and Partners store in Oxford Street, London.
The John Lewis and Partners store in Oxford Street, London. Photograph: Kirsty O’Connor/PA

It’s a bleak morning for John Lewis.

The high street chain, and bellwether for retail spending, has slumped into its first ever loss for the last six months. It also warned that Brexit uncertainty is hurting its business, and that a No-Deal departure would make things even worse.

My colleague Sarah Butler explains:

The group, which owns Waitrose as well as the John Lewis department stores, dived £25.9m into the red in the six months to 27 July after making an underlying pretax profit of £0.8m in the same period a year before.

Sir Charlie Mayfield, chairman of the staff-owned retailer, said the loss reflected lower sales in some categories, including homewares, cost inflation and IT costs.

He said he expected retail conditions to “remain challenging” and warned: “Should the UK leave the EU without a deal, we expect the effect to be significant and it will not be possible to mitigate that impact.”

Chris Daly, chief executive at the Chartered Institute of Marketing, says John Lewis is still doing better than many rivals, and enjoys “unrivalled customer loyalty.” However....

“Despite its relative strength, John Lewis is not immune to tough retail conditions. It risks heading towards a price cut trap, partly because its ‘Never Knowingly Undersold’ brand positioning forces it to pursue rivals’ discounts. Add to this customers that are tougher than ever to lure into stores, and today’s results present a stark warning.

There’s a risk that the ECB disappoints the markets today.

It’s widely assumed that Mario Draghi will announce new stimulus moves, so anything that falls short could trigger a sell-off.

Naeem Aslam of Think Markets says investors are expecting rate cuts AND more bond buying:

  • In September, cut in the deposit rate by another 10 basis points to minus 0.5 percent AND announcement of asset purchases
  • In October, the start of asset purchase- the quantitative easing
  • In December, cut in the deposit rate by another 10 basis points to minus 0.6 percent

He adds:

Mario Draghi will try his best to please the market either with his words or with his action. This is going to be a remarkable shift in the ECB’s policy especially, when the bank was so confident only 9 months ago when it said it was done with cutting rates and buying debt.

Trump delays latest Chinese tariffs

Hopes of a trade war breakthrough are growing after the US surprisingly delayed its latest tariffs on imports from China.

Donald Trump announced that plans to hike the tariff on $250bn of Chinese goods, from 25% to 30%, will be delayed for two weeks.

In a tweet (what else?) Mr Trump said a 5% increase to duties scheduled for 1 October will be postponed.

He said the delay had been requested by China. It will allow Beijing to celebrate the 70th anniversary of Communist Party Chairman Mao Zedong establishing the People’s Republic of China in 1949.

Earlier this week Beijing also offered an olive branch, by suspending new tariffs on some US imports.

The two sides are due to hold fresh talks in Washington next month, so these moves are an encouraging sign.

Introduction: Will ECB launch a new stimulus today?

Mario Draghi, President of the European Central Bank.
Mario Draghi, President of the European Central Bank. Photograph: Daniel Roland/AFP/Getty Images

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Will Super Mario save the day again? That’s the question on investors lips today as the European Central Bank holds one of the most eagerly awaited policy meetings in years.

The eurozone economy is weak, factory output is falling, and Germany may be entering recession. So, many economists predict the ECB will unleash a new stimulus programme in an attempt to spur growth.

That could include hitting banks with deeper negative interest rates, to force them to lend, or even a new QE bond-buying programme.

But ECB president Mario Draghi may have a fight on his hands today, at his penultimate governing council meeting before stepping down.

Hawkish colleages, including Klaas Knot of the Netherlands and Germany’s Jens Weidmann, have pushed back against launching more QE.

Hawks on the ECB governing council
Hawks on the ECB governing council Photograph: Bloomberg TV

However, some sort of stimulus package seems inevitable today -- if only because the markets are convinced it’s going to happen. Back in June, Draghi pledged to launched more stimulus if the economic landscape deteriorated - and thing certainly haven’t improved....

Stewart Robertson, senior economist at Aviva Investors, says there is “little doubt” that the ECB will provide fresh stimulus today.

The only debate is about the form of the easing that will be provided. How swiftly things change: it was all so different 18 months ago.

At the start of 2018, everyone was optimistic about the Eurozone’s prospects. After a year of stellar growth (for the Eurozone at least) in 2017, the path seemed clear for the ECB to prepare the ground for lift off. After a decade in the doldrums, the economy was booming and the ECB could taper its asset purchases and start to push policy interest rates up from historic lows.

“The change in stance has been brought about by renewed economic stagnation in key areas, persistently low inflation and downside risks to growth from trade and tariff worries as well as the cyclical downswing within manufacturing and industry.

The governing council is meeting this morning. Its announcement comes at 12.45pm UK time, although we may only get the full details at Draghi’s press conference 45 minute later.

Also coming up today

It’s a busy morning for retail news with John Lewis, Morrisons and Co-operative Group all reporting results.

John Lewis has posted a £25m loss, due to ongoing problems at its department stores, while Morrisons has expanded its deal with Amazon (more on this shortly).

European stock markets are expected to continue to rally ahead of the ECB meeting. Britain’s FTSE 100 is expected to gain another 0.5%, to a new five-week high.

The agenda

  • 10am BST: Eurozone industrial production for July
  • 12.45pm BST: ECB monetary policy decision
  • 1.30pm BST: ECB president Mario Draghi’s press conference
  • 1.30pm BST: US inflation figures for August

Updated

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