Deeper downturn may merit delay in rate hikes, says ECB economist

Frankfurt

THE chief economist of the European Central Bank (ECB) has added to the chorus of policy makers signalling concern on the economic slowdown, saying officials could push back plans to raise interest rates as a first response against a deeper downturn.

Peter Praet, speaking in an interview with German newspaper Boersen-Zeitung, said: "If the euro-area economy were to slow more sharply, we could adapt our forward guidance on interest rates and this could be complemented by other measures.

"But one thing is clear: the ECB's governing council will always find ways and means of acting if it needs to."

Mr Praet, who proposes policy to the ECB's governing council, is the second official in as many days to flag a potential shift in language that currently pledges unchanged borrowing costs at least through the summer. France's Francois Villeroy de Galhau also mentioned a change in wording as an option to deal with a more protracted slowdown.

Traders in money markets aren't pricing the first 10-basis-point interest-rate hike until June 2020. Slowing growth has also triggered a rally across the region's bond markets, with the yield on 10-year German bunds threatening to go negative for the first time since 2016.

Asked whether he expected an adjustment to forward guidance already at the ECB's March 7 meeting, Mr Praet said he wasn't able to say "at this stage". While next month's projections will likely show downward revisions to 2019 growth and inflation, the policy is set with medium-term prospects in mind, he said.

The extent of the weakness in the 19-nation economy has surprised policy makers. Italy entered recession; Germany only narrowly avoided the same fate at the end of 2018.

Political uncertainty, particularly related to protectionism and Brexit, is "by far" the biggest problem constraining growth, said Mr Praet, who will retire from the executive board in May.

"The more time passes, the greater their likely negative impact on the economy," he said. "It is high time to put an end to these uncertainties in a positive way." While a rebound in activity is likely, it's "too early to say by how much", he said.

His colleague Benoit Coeure has held out the prospect of fresh long-term loans amid a slowdown that's "clearly stronger and broader". Speaking on Friday, the Frenchman said discussions about a new funding round are under way at the ECB - comments that weakened the euro and sparked a rally in European bank stocks.

Mr Praet said targeted longer-term refinancing operations (TLTROs) "have been a very useful tool to deal with impairments in the transmission of monetary policy". More than 720 billion euros (S$1.1 trillion) in current four-year financing will start to mature from June next year. Some officials including Mr Coeure have said policy makers will need to find a monetary-policy case to offer a new round. Mr Praet said officials will assess the current and expected state of bank transmission at their March meeting. BLOOMBERG