ECB Eyes Data as Slowdown Proves ‘Significant,’ Villeroy Says

(Bloomberg) -- The slowdown of the European economy is “significant” and the European Central Bank could change its interest-rates guidance if it becomes clear the situation isn't temporary, Governing Council member Francois Villeroy de Galhau said.

The extent of the weakness at the end of 2018 has taken policy makers by surprise, with Italy entering recession and Germany narrowly avoiding the same fate. The ECB has so far stuck to its guidance that it will keep borrowing costs at record lows at least through the summer, indicating hikes could come after that.

Asked in an interview with Spanish paper El Pais if poor economic data decreases the likelihood of a rate increase after the summer, Villeroy said the ECB will look at the numbers.

“The key question will be if the slowdown is temporary -- with a bounce-back during this year -- or more durable,” he said.

The comments are another dovish signal after Executive Board member Benoit Coeure said Friday that the ECB is discussing whether to offer new longer-term loans to banks. Investors responded to Coeure's comments by selling the euro and buying bank stocks.

Speaking in an interview with German newspaper Handelsblatt, Finnish central bank governor Olli Rehn said the ECB needed a "clear and convincing monetary policy case" for deploying new longer term loans known as TLTROs. He said that "the design is key because it determines which impact they have on the economy."

Rehn, seen among front runners to succeed Mario Draghi as ECB president, said that if growth in the Euro-area weakens even more, the ECB "has all its instruments available." He also urged Germany, the euro area's biggest economy, to invest more into its digital and traffic infrastructure.

Villeroy told El Pais that the ECB could be “extremely efficient” using a trio of instruments, including tools for increasing liquidity to banks, as well as its stock of asset purchases and interest rates.

“We will be pragmatic in using this trio,” he said.

Villeroy, who is also governor of the Bank of France, said the main problem facing the euro-area economy is global political uncertainty. That hurts Germany more than other European countries such as France and Spain, where economies rely more on domestic demand, which is resilient, he said.

“If political leaders are able in the months to come to diminish this uncertainty, it would significantly improve the economic picture,” Villeroy said.

--With assistance from Piotr Skolimowski.

To contact the reporter on this story: William Horobin in Paris at whorobin@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow, Brian Swint

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