MADRID (Reuters) – The balance of euro zone growth risks is clearly tilted to the downside, European Central Bank policymaker Pablo Hernandez de Cos said on Saturday, citing a disorderly Brexit as a key risk and acknowledging the ECB’s shortcomings in meeting its inflation goals.
De Cos said in a speech in La Granda in northern Spain that Britain’s withdrawal from the European Union “remains a focus of first-order uncertainty for the global economy and, especially, for the rest of the EU.
“The most recent events, including the decision to suspend the activity of the British Parliament by the new prime minister until mid-October, have increased the likelihood that markets are giving to a hard Brexit,” De Cos said.
British Prime Minister Boris Johnson said on Wednesday he will suspend parliament from mid-September to mid-October ahead of an Oct. 31 Brexit deadline, raising the stakes in the country’s deepest political crisis in decades.
De Cos also mentioned the political situation in Italy, doubts about the intensity of China’s economic slowdown, and vulnerabilities in emerging economies such as Turkey and Argentina as risk factors.
He added that protectionist measures were among the greatest threats to global activity, in a reference to the trade war between the United States and China.
The euro zone barely grew in the second quarter and Germany, the bloc’s power house, may already be in recession as a global trade war, China’s slowdown and Brexit uncertainty reduce export demand and sap confidence in the manufacturing sector.
De Cos said the slide in recent months in the global services sector purchasing managers’ index, which had previously been more robust indicated a growing risk of a slowdown in global activity, De Cos said.
ECB policymakers are concerned about weak growth, and the minutes of their July 25 meeting showed options on the table include a combination of rate cuts, asset purchases, changes in the guidance on interest rates and possibly support for banks.
De Cos said there was a possibility that low or even negative interest rates may have an adverse effect on financial stability and banks.
“It is necessary to closely monitor this issue to determine whether measures that mitigate the adverse effects of low rates on the intermediation capacity of the banking system are necessary,” De Cos said.
He also noted that inflation has persistently undershot the ECB’s target of below but close to 2%. In August, euro zone inflation remained low at 1.0%.
“You cannot consider that observed or projected levels of inflation (…) are compatible with the ECB mandate,” he said.
(Reporting By Jesús Aguado; editing by Andrei Khaplip and Hugh Lawson)