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Low rates may hamper ECB says Christine Lagarde

By Amanda Cooper

ECB chief says euro zone stabilises but low rates limit bank's room to ward off weakness

The euro zone economy has stabilised thanks to an easing in trade tensions but, while low interest rates have helped consumer spending and corporate borrowing, they have limited the ability of the European Central Bank to ward off another downturn, according to bank president Christine Lagarde.

Lagarde, who was addressing the economic and monetary affairs committee of the European Parliament, said the domestic economy remained resilient, although momentum was modest and “global factors” were weighing on growth in the euro area.

Low inflation, interest rates at zero percent and other accommodative policy measures had helped underpin household consumption and business investment in the euro zone, Lagarde said. The downturn in manufacturing activity towards the end of 2019 appears to have bottomed out and there is less uncertainty over global trade following a preliminary agreement between the United States and China in early January, she added.

However, as the ECB noted in its monthly economic bulletin, released separately on Thursday February 6 2020, the risks to growth remain tilted to the downside.

“This low interest rate and low inflation environment has significantly reduced the scope for the ECB and other central banks worldwide to ease monetary policy in the face of an economic downturn,” Lagarde told the committee.

The ECB noted that easier borrowing conditions for firms and households would help sustain the euro area expansion and a build-up of domestic price pressures that would eventually drive inflation back towards the central bank’s 2 per cent target. Euro zone inflation, excluding food and energy, is currently at 1.3 per cent and expected to fall further in January, according to TradingEconomics.

“These favourable financing conditions in turn continue to support business investment and consumer and construction spending in the euro area, partially offsetting the negative impact from sluggish developments in global demand” Lagarde told the European Parliament.

FURTHER READING: ECB holds policy as it launches strategic review

FURTHER READING: ECB data indicates growing split in euro zone economy

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