Rehn Sees ECB Outlook Confirmed as Loan Decision Looms in June
The latest economic indicators confirm the European Central Bank’s outlook despite a flurry of risks, according to Governing Council member Olli Rehn.
The comments are important because policy makers have pinned the design of new long-term loans -- likely to be announced in June -- and the potential need for measures mitigating the impact of negative interest rates to economic prospects in the 19-nation euro area. In an interview with Bloomberg, Rehn suggests a growth rebound later this year is still in the cards, even though some data including business sentiment have disappointed recently.
“We made a material revision in March concerning the growth outlook. For the moment this forecast of March is valid and we are working on the basis of that,” the Finnish central-bank governor said on the sidelines of the meetings of the International Monetary Fund in Washington. Still, “risks to the outlook are tilted to the downside because of uncertainties like China’s slowdown, trade tensions, and certain geopolitical factors. We will assess these in the course of the coming weeks.”
Officials often wait for their quarterly forecasts before delivering major policy decisions. An update will be available in June, after ECB staff slashed its outlook in March. Rehn expects that by then, “we’d be able to take a decision on the concrete parameters” of the long-term funding program for euro-area banks, so-called TLTRO-III. “We will also as part of our regular assessment analyze the impact of negative interest rates.”
The ECB’s deposit rate has been below zero for almost five years, and weaker economic growth has pushed back expectations for an increase. With banking associations increasingly vocal about detrimental side effects on profitability, policy makers have agreed to study measures mitigating the impact, potentially by exempting some portion of deposits in a so-called tiering system.
“Negative rates have been supportive -- together with other unconventional measures -- of restoring and further improving the monetary transmission mechanism, which means they have been supportive of investment, job creation, consumption and growth,” Rehn said. “The effect of negative interest rates may have changed in the course of their existence and as part of our regular assessment we will analyze pros and cons of negative interest rates, which is only natural and necessary.”
In a separate interview with Bloomberg TV’s Francine Lacqua, Italian Governing Council member Ignazio Visco shared Rehn’s opinion that more work is needed to weigh fully all channels affected by negative rates.
“While there have been net margins which have suffered from that, at the same time credit has expanded and therefore the bank business has improved,” Visco said in Washington. “We have to evaluate these side effects -- this is what we’re doing, it is not somehow already a decision taken.”
Visco pointed to recently conflicting figures that make reading the economy more difficult. Industrial production surged at the start of the year, while confidence has declined in the nine months through March.
“We have to be very prudent,” Visco said. “Growth will be moderate, inflation is not yet where we would like it to be, and we need to maintain an ample degree of accommodation.”
Rehn pointed to a number of “question marks” that may substantially sway the ECB’s outlook: “There is pervasive uncertainty in the world economy for the moment, which is why we have to be alert.”
He cautioned against relying too much on external stimulus to shore up the euro-area economy, suggesting that China’s efforts to rekindle growth may not produce the same kind of spillover for Europe as before. “The nature, scale and composition of fiscal stimulus this time is somewhat different than we have previously seen,” Rehn said.
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