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European Central Bank policy makers said the institution will act if needed to support the economy, keeping alive the possibility of interest-rate cuts or quantitative easing returning to the euro area.
Executive Board member Benoit Coeure and Governing Council member Pablo Hernandez de Cos said officials are monitoring signals from markets, though added they will make their own assessment of the situation before any monetary policy action.
Officials have “more doubts” about euro-zone inflation reaching their goal, Bank of Spain Governor Hernandez de Cos said at a conference in Santander (MC:SAN). He also said economic growth will slow this quarter after a strong start to the year, and noted the increased risks from trade tensions and a “hard” Brexit.
Those were among the concerns the forced ECB President Mario Draghi to extend the central bank’s forward guidance this month and pledge to keep rates on hold at least through mid-2020. Hernandez de Cos reiterated that the institution is ready to use other tools, including rate cuts, to boost inflation and growth.
“The ECB is prepared to act if necessary,” he said.
In a Financial Times interview, Coeure said most of the economic concerns relate to manufacturing, and may be temporary, but that signals coming from financial markets are “quite alarming.”
“So far we’re talking about contingency planning,” he said. “But at some point during our next few meetings, we might very well be facing a situation where risks have materialized.”
The remarks come ahead of the ECB’s annual symposium in Sintra, Portugal, which kicks off Monday evening with remarks from Draghi. Policy loosening is also on the horizon for Federal Reserve, which meets this week. Investors are primed for it to indicate a willingness to lower the U.S. benchmark rate in coming months.
“The constellation of prices in the bond market paints a picture of the global economy which is very bleak,” Coeure told the FT. “Central banks should never ignore market signals. They shouldn’t follow them blindly either.”
German 10-year bond yields dropped below zero in early May and are now at -0.243%, close to a record low. A markets measure of euro-area inflation expectations has also plunged.
Coeure said the all options for loosening “come with costs and benefits,” but “none of this would deter us from acting.” If the decision is rate cuts, then the ECB would consider tiering to mitigate side effects.
