February 22, 2019 / 3:53 PM / 5 months ago

ECB could adapt policy guidance if slowdown drags on - Villeroy

LISBON, Feb 22 (Reuters) - The European Central Bank (ECB) would be ready to change its monetary policy guidance if a current downturn drags on for longer than expected, ECB policymaker Francois Villeroy de Galhau said on Friday.

Villeroy said in a speech in Lisbon that temporary factors, such as a contraction in German manufacturing output and protests in France, were weighing on growth.

“If these drags fade away, and if geopolitical risks recede, GDP growth could rebound from next spring or summer,” said Villeroy, who is also governor of the Bank of France.

“But should a downturn last beyond that horizon – a less plausible scenario but one which cannot be excluded – we would be ready to adapt our monetary policy guidance,” he added.

The ECB has said it expects to keep interest rates at current record lows at least through the summer, although that long-standing guidance is increasingly out of sync with market expectations since euro zone growth has slowed.

Against that backdrop, policymakers have so far steered clear of putting out signals on interest rates beyond the term of current ECB chief, Mario Draghi, who is due to leave office on Oct. 31.

While hesitating on the rates outlook, the ECB is preparing the ground for more multi-year, cheap loans for banks to keep credit flowing amid weaker growth.

This would also help lenders in Italy and other southern European countries avoid a funding cliff edge when the previous ‘Targeted Long-Term Refinancing Operation’ (TLTRO) starts maturing next year.

Villeroy said the ECB could not tailor policy for specific countries or banks and should “look at the whole spectrum of possible tools, including various forms of LTRO, to decide about the recalibration of conditions and maturities.”

He also said the ECB should be careful if it keeps negative interest rates for longer than planned, over concerns that the impact on banks’ profits could weigh on the effectiveness of its monetary policy.

“If we had to use negative rates for a longer period than expected, we should study pragmatically how to contain their possible adverse effects on the bank transmission of our monetary policy,” Villeroy said. (Reporting by Sergio Goncalves; Writing by Leigh Thomas; Editing by Sudip Kar-Gupta)

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