FRANKFURT (Reuters) -Shifts in the risk profile of euro zone inflation will impact ECB policy decisions and a rise in the chance of undershooting the target would firm the case for a 'slight'
ECB Officials Suggest Potential Rate Cuts Amid Declining Inflation Risks
ECB's Stance on Interest Rates and Inflation
By Balazs Koranyi
Current Rate Decisions
FRANKFURT (Reuters) -The European Central Bank may need to reduce borrowing costs slightly if the risk of inflation going too low increases, but interest rates are appropriate now, the ECB's top brass said on Monday.
Risks and Economic Factors
The central bank for the 20 euro zone nations has cut interest rates by 2 full percentage points in the year to June but rates have been on hold ever since as the bank debates whether to go lower or level off at the current 2% since inflation is now at target.
Impact of U.S. Tariffs
"Shifts in the risk distribution will also matter for our rate decisions: an increase in the likelihood or intensity of downside risk factors would strengthen the case that a slightly lower policy rate might better protect the medium-term inflation target," the ECB's chief economist, Philip Lane, said in a speech in Frankfurt.
Euro's Strength and Inflation Effects
"Alternatively, an increase in the likelihood or intensity of upside risk factors would indicate that maintaining the current policy rate would be appropriate in the near term."
However, ECB President Christine Lagarde argued that the risk of undershooting the 2% target was shrinking even though trade tensions with the U.S. keep the outlook uncertain.
"As new information has come in, the range of risks on both sides has narrowed," Lagarde told lawmakers in Strasbourg.
Financial markets see almost no chance of another rate cut this year and comments from Lagarde and ECB Vice President Luis de Guindos only strengthened those expectations.
"We could say that risks for inflation are balanced and that our projections, which showed that the price stability objective can be secured in some way, are being fulfilled to some degree," de Guindos told an event in Madrid.
"We consider the current level (of interest rates) to be appropriate based on recent inflation trends."
But the jury is still out. Some policymakers fear that the full extent of U.S. tariffs is yet to be felt and a strong euro will hurt exporters while pulling overall inflation below the ECB's 2% target.
Lane noted that the stronger euro has a multi-year impact on activity and inflation, and the underlying reasons for the currency movement affect the extent of the price shock.
"These effects will be larger than the average if euro appreciation is more due to external factors, such as weakness in main trading partners or portfolio rebalancing due to an increase in the risk premium in overseas financial markets," he said.
The euro is up 13% against the dollar since the start of the year as investors have reduced dollar holdings owing to concerns about erratic U.S. economic policy.
(Reporting by Balazs KoranyiEditing by Kirsten Donovan, Alexandra Hudson and David Goodman)
