May 29, 2019 / 8:49 AM / 3 months ago

Rehn says ECB ready to react if slowdown persists

LONDON (Reuters) - The European Central Bank is ready to reintroduce monetary support measures if required, policymaker Olli Rehn said on Wednesday, while hitting out at calls from Italy for it to guarantee countries’ debt.

Governor of the Bank of Finland, Olli Rehn attends a Reuters Newsmaker event in London, Britain, May 29, 2019. REUTERS/Hannah McKay

Speaking at a Reuters Breakingviews event, Rehn said the ECB would discuss options at a policy meeting next week, when it will also have a new set of in-house economic forecasts at its disposal.

“We now have a soft patch in the economy and we are analyzing whether this is a genuine soft patch or a more of a long lasting economic slowdown,” Rehn said, blaming the U.S.-China trade war for further eroding confidence.

“If things turn south and we face a recession we are ready to use all instruments.”

While a euro zone recession was not currently the central scenario, an ample degree of policy stimulus remained appropriate, Rehn said.

The ECB was already set to provide details for what is expected to be a generous new program of cheap bank loans, known as TLTROs, but other instruments may also be examined.

“Look at the toolbox,” Rehn said referring to its available options. “We have interest rates, reinvestment from the asset purchase program, forward guidance, and TLTROs.”

Rehn, who also heads the Bank of Finland and is viewed as an outside bet to take over as ECB president when Mario Draghi steps down in October, repeated calls for a slightly more flexible policy framework for the bank.

Persistently low inflation across the developed world has prompted a debate about central bank policy and the effectiveness of inflation-targeting.

Rehn said he would not change the ECB’s inflation-focused mandate but would loosen its close-but-below 2% definition of price stability. “My view is that 2% is not a ceiling and inflation can deviate in both directions,” he said.

He rejected a call this week by Italy’s Deputy Prime Minister Matteo Salvini for the ECB to “guarantee” government debt in order to keep borrowing costs low.

“It is no surprise that I am not very fond of this idea as it goes against the principal of modern central banking that we are forbidden to do monetary financing,” Rehn said.

On the knock-on effects of the trade war, he added: “On the one hand you can say that trade tensions also impact inflation upwards, but that factor is fairly limited.

“The main effect today is whether we are reaching a threshold that trade wars start to erode the supply and production chains. That is the essence of economic globalization that we have cross-border production chains.”

Reporting by Marc Jones and Dhara Ranasinghe; editing by John Stonestreet

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