March 7, 2019 / 5:26 PM / 19 days ago

ECB's Draghi surprised colleagues with bold stimulus plans: sources

FRANKFURT (Reuters) - European Central Bank President Mario Draghi caught even dovish rate-setters off guard by pushing on Thursday for unexpectedly generous stimulus after forecasts showed a large drop in economic growth, four sources familiar with the discussion said.

Mario Draghi, President of the European central Bank (ECB) attends a news conference on the outcome of the Governing Council meeting at the ECB headquarters in Frankfurt, Germany, March 7, 2019. REUTERS/Kai Pfaffenbach

At its policy meeting, the ECB delayed its first post-crisis rate hike into 2020 and offered banks more ultra-cheap loans, arguing that persistent uncertainty from a global trade war to Brexit was causing lasting damage to the euro zone economy.

Policymakers had not expected to change their guidance on interest rates. But Draghi confronted them with forecasts showing growth at just 1.1 percent in 2019, less than half what the ECB predicted a year ago, and proposed a wider set of measures than rate-setters had prepared for, the sources said.

“Growth is below trend now and the output gap is opening up again,” one of the sources said. “It’s is worrying because very little of this slowdown is actually temporary.”

Another source said it became clear only on Monday that the ECB would opt for more radical action, when policymakers were already in their quiet period and therefore unable to alter market expectations.

The exceptionally weak growth projection, along with a notable drop in lending, was also the reason why the ECB went ahead with announcing a fresh round of longer-term loans to commercial banks, while giving itself more time to working out the details.

More conservative policymakers tried to push back but largely failed.

Some argued that risks to growth should not be described as being to the downside, given that the ECB slashed forecasts and took big policy steps.

Their only victory was batting calls by some for ruling out a rate hike until April 2020, rather than just until next year. Since it was important to keep the decision unanimous, Draghi backed the proposal for unchanged rates until the end of the year, they added.

“There was wide agreement that it was right to act now because waiting until April would not have made much sense,” a third source added.

An ECB spokesman declined to comment.

Reporting by Francesco Canepa, Frank Siebelt, Balazs Koranyi; editing by John Stonestreet

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