Trade war fears already hurting the economy, ECB's Coeure says

CERNOBBIO, Italy (Reuters) - A trade war triggered by U.S. tariffs would cause a global recession - and the mere fear of one is already hurting the economy, European Central Bank board member Benoit Coeure said on Friday.

FILE PHOTO: Benoit Coeure, board member of the European Central Bank (ECB), is photographed during an interview with Reuters journalists at the ECB headquarters in Frankfurt, Germany, May 17, 2017. REUTERS/Kai Pfaffenbach

Investors have been wondering whether an economic slowdown, aggravated if not caused by global trade tensions, could delay the end of the ECB’s exit from its aggressive monetary stimulus, aimed at boosting inflation in the euro zone.

Coeure said the prospect of a trade war was not being discussed by the ECB and its effects on inflation would only become visible in the long term.

But he added that expectations of escalating tit-for-tat trade actions between the United States and their partners were already hurting borrowers and investors.

“Falls in equity prices in response to the U.S. announcement to impose a tariff on steel and aluminum, and prevailing uncertainty on the scope of any retaliatory measures, have already contributed to tighter financial conditions,” Coeure said at an event in Cernobbio, Italy.

Citing an ECB simulation, he said a 10 percent tariff on all U.S. imports and exports would cause the global economy to shrink by 1 percent in the first year, with the United States among the worst hit and the euro zone suffering a less severe decline.

With euro zone inflation hovering just below 1.5 percent, the ECB is widely expected to wind down its 2.55 trillion-euro bond-buying program this year and raise interest rates in mid-2019.

But declines in stocks and weaker economic data, including some surveys of euro zone activity, have got some investors wondering whether Frankfurt will stick to this path.

Coeure said trade wars were not part of the ECB’s policy deliberations and reaffirmed the bank’s message that its policy stance will remain easy.

“That is not a discussion that we are having today,” Benoit Coeure told CNBC Television when asked whether the ECB would act in anticipation of a trade war.

“There is very broad agreement in the Governing Council of the ECB that the high degree of accommodation will remain needed, and that (is) irrespective of a trade war,” he added.

Reporting By Mark Bendeich, writing by Francesco Canepa in Frankfurt; editing by Larry King