ECB’s Guindos Says Path to Normalization Is More Challenging

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The European Central Bank still has its sights set on a return to “normal” monetary policy, but the task has become far harder over the past year, according to Vice President Luis de Guindos.

An economic slowdown in late 2018 has dampened the euro-zone outlook for this year and forced the ECB to say it’ll keep interest rates at record lows until at least 2020. Banks are complaining about low profitability, a concern that Guindos raised as he presented his Financial Stability Review on Wednesday.

“The process of normalization continues but the outlook is much more challenging than it was, and it has an impact on financial stability,” he said in a Bloomberg Television interview with Matt Miller. “There are a lot of downside risks, but this time the risks are related mainly to situations outside the borders of the euro area, and that’s something we have to take into consideration.”

The ECB will meet on June 5-6 in Lithuania to set policy based on updated economic forecasts. Despite years of unconventional stimulus, officials will find themselves debating whether a new round of long-term loans to banks should have generous terms to further boost lending and growth.

At the previous meeting in April, some policy makers said they had become less confident in predictions for an economic upturn in the second half of the year, and that declining inflation expectations were a worry. Data since then has been mixed -- for example, figures this week showed euro-zone confidence unexpectedly rising, but German unemployment climbing for the first time in almost two years.

Guindos said the main external threat is potential trade tariffs. While tit-for-tat measures between the U.S. and China are the key global focus for now, Europe is still criticized by U.S. President Donald Trump and the bloc could be hit by import duties on its auto industry.

“The real risk would be an escalation toward a sort of fully-fledged trade war, and that would be detrimental to the global economy, to the euro-area economy,” Guindos said. “I hope that will not be the case and at the end of the day common sense will prevail.”

To contact the reporters on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net;Paul Gordon in Frankfurt at pgordon6@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien, Catherine Bosley

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