MADRID: The balance of euro zone growth appears negative, European Central Bank (ECB) policymaker Pablo Hernandez de Cos said on Saturday, citing a disorderly Brexit as a key risk and acknowledging the ECB’s shortcomings in meeting inflation goals.
De Cos said in a speech in La Granda in northern Spain that the UK’s withdrawal from the EU “remains a focus of first-order uncertainty for the global economy, especially for the EU.
“The most recent events, including the decision to suspend the British Parliament by the new prime minister until mid-October, have increased the likelihood of a hard Brexit,” De Cos said.
British Prime Minister Boris Johnson said on Wednesday he would 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 risks.
He added that protectionist measures were among the greatest threats to global activity, in a reference to the trade war between the US and China.
The euro zone barely grew in the second quarter and Germany, the bloc’s power house, may already be in recession as the trade spat, China’s slowdown and Brexit uncertainty reduce export demand and sap confidence in the manufacturing sector.
De Cos added 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.
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 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.”
He also noted that inflation has persistently undershot the ECB’s target of below but close to 2 percent. In August, euro zone inflation remained low at 1 percent.
“You cannot consider that observed or projected levels of inflation ... are compatible with the ECB mandate,” he said.