ECB’s de Guindos: Eurozone Still Needs Strong Monetary Policy Support

20 February, 2020

By David Barwick - FRANKFURT (EconoStream) - Economic uncertainty implies a continued need for strong monetary policy support in the Eurozone, European Central Bank Vice President Luis de Guindos said Thursday.

Speaking at the European Banking Federation Committee meeting, de Guindos, according to a text of his speech provided by the ECB, said that ECB policy accommodation would ultimately lead to the return of price stability.

The ECB stands ready to adjust its stance as needed to ensure such a return, he said, but is also alert to potential side effects from its measures.

“Against a backdrop that remains clouded, the euro area economy still needs strong support from monetary policy,” he said.

Current ECB measures provide “substantial support to growth and inflation developments,” he said, “buffering to a large degree the negative impulse from global factors. Indeed, the unfolding of our monetary policy measures will ensure that financial conditions will remain very favourable, shielding the economy against the external headwinds and laying out the conditions for the build-up of domestic price pressures.”

De Guindos repeated the ECB’s forward guidance, according to which rates would remain at current or lower levels until inflation projections are consistent with the central bank’s view of price stability.

The ECB, he said, must “carefully and continuously” keep an eye out for unwelcome side effects from its policy stimulus, which also includes monthly asset buys to the tune of 20 billion euros; monetary authorities’ intention to continue reinvesting principal payments stemming from the asset purchase programme beyond an eventual rate hike; and the most recent series of TLTROs.

Strong labour markets and favourable financing conditions are helping to get the Eurozone economy through the moderation in growth of recent quarters, he said, but industrial output confirms that the area is having a hard time putting behind it the weakness of the manufacturing sector.

“We draw some comfort from the fact that, as yet, we do not see spillovers from the manufacturing weakness to the service sector,” he said.

Beyond the region’s borders, economic activity has picked up of late, de Guindos said, pointing to the manufacturing output PMI. Still, he noted, global trade is subject to high uncertainty.

“Looking ahead, the underlying fundamentals for a continued though moderate expansion of the euro area economy remain in place,” he said, reiterating the latest Eurosystem staff projections calling for GDP growth of 1.1% this year and 1.4% the following two years.

However, he added, “the risks surrounding the euro area remain tilted to the downside. In particular, the outbreak of the coronavirus and its potential effect on global growth add a new layer of uncertainty.”

Turning to inflation, de Guindos predicted that “resilient and broad-based” wage growth would bolster price developments in the months ahead. The effect on inflation of strengthened labour cost pressures is delayed, however, “as firms appear to be absorbing wage rises in their profit margins rather than passing them on to customers,” he said.

Although long-term inflation expectations based on survey data were at least 1.7%, he said, expectations implied by the market “have stagnated at levels that are not consistent with our medium-term inflation aim.”

Still, inflation would increase, he affirmed, citing staff projections.

In its monetary policy strategy review, the ECB would “reflect on how other considerations, such as financial stability, employment and environmental sustainability, can be relevant in pursuing the ECB’s mandate,” he said.

However, the review would not affect the regular conduct of policy, which would depend as always on circumstances, he asserted: “Our reaction function is clear and entirely data-driven.”