PARIS (Reuters) - The European Central Bank is confident inflation is on the right track although the specter of protectionism and other risks including Brexit are adding to broader economic uncertainty, ECB policymaker Francois Villeroy de Galhau said on Thursday.
Speaking at a conference at the French central bank which he also heads, Villeroy said “the risk of an escalating and global trade war is no longer unthinkable” following tit-for-tat tariff measures announced by the United States and China.
“Whilst we might be a bit less certain precisely where we are in the cycle, we are more confident that we are heading in the right direction on inflation,” Villeroy said.
He said that most classical economic analysis, including by the International Monetary Fund, “seriously underestimates” the potential impact of higher trade tariffs.
Trade protectionism spurs flight from risk in financial markets, squeezing credit, and also weighs on business confidence, discouraging investment, he said.
Moreover, the threat of protectionism was enough to unsettle investors and have a negative impact even if trade restrictions are not followed through.
With uncertainty the enemy number one of growth and financial stability, the ECB was trying to provide a counterbalance, he said.
“By providing clear guidance on the path of asset purchases and interest rates - once more several months in advance - we have done our best to reduce uncertainty about future monetary policy conditions, at least out to the horizon that it is prudent to do so,” Villeroy said.
The ECB took its biggest step yet last Thursday towards winding down its crisis-era program of stimulus, announcing plans to close down its exceptional bond purchase scheme by the year-end.
Flagging new guidance for its future monetary policy path, it also signaled that it expected interest rates to remain steady at least through the summer of 2019.
Reporting by Leigh Thomas; editing by Richard Lough