Pedestrians walk past the euro sign sculpture as it stands outside the former European Central Bank (ECB) headquarters in Frankfurt, Germany (Photographer: Krisztian Bocsi/Bloomberg)

ECB's Nowotny Urges Caution on Rate Increases as Growth Slows

(Bloomberg) -- The European Central Bank will need to move cautiously when it eventually starts raising interest rates, according to Governing Council member Ewald Nowotny.

While the ECB’s guidance suggests rates could rise after the summer, investors don’t see a hike until 2020 because of the slowing economy. Asked in an interview with Der Standard newspaper whether borrowing costs will be increased this year, the Austrian governor sidestepped the question.

“What is true for other areas of life also applies to monetary policy: never say never,” he said in the interview. “If there is an interest-rate move, it will be a cautious one.”

The euro zone’s flagging economic momentum complicates the decision, but a widening rate differential versus the U.S. over the long term “is not unproblematic,” he said. He added that global economic growth has weakened, but from a very strong pace and the situation is in no way comparable to the post-2008 crisis.

President Mario Draghi said last month that risks to the euro-area economy were worsening as the central bank lowered its growth forecast. Speaking on Thursday after a series of downbeat economic releases, French central bank governor Francois Villeroy de Galhau said the ECB should keep all of its options open and wait until the spring before tweaking its policy.

A key concern is that Germany, the region’s largest economy, is in danger of a technical recession -- two straight quarters of contraction. The country’s gross domestic product figures for 2018 will be released next week.

While emissions-testing standards temporarily curbed production in the auto industry, Nowotny worried over whether deeper issues might be at play.

“What worries me most are psychological factors,” Nowotny said. ‘‘The real drama arises if it came to real structural breaks in the export- and machinery-oriented economy. Germany could be vulnerable there.”

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