Visco says ECB will need to act if euro zone economy doesn't pick up

MILAN (Reuters) - The European Central Bank will need to adopt further expansionary measures if the euro zone economy does not pick up, and it will consider its options “in the coming weeks,” governing council member Ignazio Visco said on Friday.

FILE PHOTO: Bank of Italy Governor Ignazio Visco speaks to reporters during the G20 Finance Ministers and Central Bank Governors Meeting in Fukuoka, Japan June 9, 2019. Franck Robichon/Pool via REUTERS/File Photo

In a keynote speech in Milan, the Bank of Italy Governor said that “in the coming weeks the ECB will continue to assess how to adjust the instruments at its disposal” in the face of weak growth and low inflation expectations.

His words may fuel expectations that the bank will ease policy at its next meeting on July 25 or in September.

Visco said the Italian economy will grow just 0.1% this year, marginally below the government’s 0.2% official forecast, and expand by an average of slightly below 1% in each of the following two years.

The euro zone’s third largest economy eked out growth of 0.1% in the first quarter, emerging from a shallow recession in the second half of last year. National statistics institute ISTAT has warned the second quarter may show another contraction.

Visco welcomed the recent fall in Italian borrowing costs and urged the anti-austerity government to adopt “prudent” budget deficit targets for coming years to consolidate the trend.

Italian bond yields fell this month to their lowest since 2016, thanks to a deal with the European Commission which averted a clash over Rome’s public finances, and to expectations the ECB will retain its ultra-dovish stance under its incoming president, Christine Lagarde.

However, doubts remain over 2020, when the government needs to find 23 billion euros ($25.91 billion) to just to avert a scheduled increase in sales tax, and must also finance promised cuts in income tax.

“The confidence of families and firms could be hurt by uncertainty over budget policy which has been dissipated for this year but is still alive regarding 2020,” Visco said in his speech to Italy’s banking lobby annual assembly.

Turning to Italy’s banking sector, the central bank chief called for mergers among the country’s smaller banks to make them more competitive and less vulnerable.

“We are aware of the complexity of consolidation, but work must be begun quickly to move in this direction,” he said.

Precautionary recapitalization by the state for struggling banks should be made easier when market solutions are not viable, he said.

Reporting by Elvira Pollina, writing by Gavin Jones