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ECB could change rate guidance if outlook worsens, says chief economist

[FRANKFURT] The European Central Bank's (ECB) chief economist added to the chorus of policymakers signalling concern on the economic slowdown, saying officials could push back plans to raise interest rates as a first response against a deeper downturn.

"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," Peter Praet said in an interview with German newspaper Boersen-Zeitung published late on Monday. "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 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.

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.

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The extent of the weakness in the 19-nation economy has taken policymakers by surprise. Italy entered recession and Germany narrowly avoiding the same fate at the end of 2018. Growth in the region's biggest economy will likely remain subdued at least through the first half of this year, with deteriorating business expectations threatening to hamper company investment, the Bundesbank said Monday.

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" growth will pick up in the coming months, said Mr Praet.

His colleague Benoit Coeure has held out the prospect of fresh long-term loans amid a slowdown that's "clearly stronger and broader". Speaking in New York 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 so-called 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 tillion) in current four-year financing will start to mature from June next year. Some officials including Mr Coeure have said policymakers will need to find a monetary-policy case to offer a new round.

According to Mr Praet, officials will assess the current and expected state of bank transmission at their March meeting.

BLOOMBERG