Constancio Says ECB Stands Ready to Act on Bad Economic Data

European Central Bank Vice President Vitor Constancio said policy makers are ready to provide more stimulus if data keep suggesting that the euro-area economy is struggling to emerge from recession.

“We stand ready to act if economic conditions continue to provide bad news, as unfortunately has been the case in recent data that became available,” Constancio told lawmakers in Brussels today. “We have done a lot” and “we certainly still have some margin for maneuver to take some action.”

Economists from UBS AG to Royal Bank of Scotland Group Plc predict policy makers will lower borrowing costs next week after gauges of manufacturing and services activity for April underscored weakness in output. ECB President Mario Draghi said on April 19 he hasn’t seen any improvement in economic data in the region as a whole, after hinting at the beginning of the month he might cut interest rates if the recovery faltered.

“Monetary policy is accomodative and as we have said, it will continue to be accomodative to respond to the present conditions in which inflation is going down in a significant way,” Constancio told reporters after the hearing.

Inflation rates have “declined rapidly” to 1.7 percent in March, Constancio said in his testimony. The ECB aims to keep inflation just below 2 percent.

The ECB, which has kept interest rates at a record low of 0.75 percent since July, last month predicted the euro-area economy will contract 0.5 percent this year before growing 1 percent in 2014.

Knot, Asmussen

ECB Governing Council member Klaas Knot said on April 21 since the forecasts were published “data coming in have shown that the risks are on the downside.” The central bank still has “conventional and unconventional” monetary policy measures at its disposal, he added.

“The effectiveness of rate cuts is limited but it’s still possible to do this if data justified it,” Executive Board member Joerg Asmussen said in Washington last week.

German business confidence fell for a second month in April after winter weather hindered the recovery in Europe’s largest economy. The Bundesbank this week cast doubts on a recovery in the first quarter, citing sluggish industrial output.

Euro-area banks continued to tighten credit standards in the first quarter, albeit at a slower pace, as demand for loans declined, the ECB said in a report today. Borrowers’ risk and macroeconomic uncertainty remain the “main concerns” in setting lending policies, it said.

Liquidity Provision

Constancio said the ECB is considering options to stimulate lending as banks don’t use widened collateral rules to the extent officials had anticipated.

“The ECB can provide liquidity, but it can’t force banks to lend,” he said.

Policy makers are working on a plan to improve funding conditions for small and medium-sized enterprises in the region. SMEs account for about half of all employment in Italy and Spain, compared with about a third in France and Germany, and those companies have seen their borrowing costs rise relative to rivals in Germany since the beginning of the sovereign debt crisis.

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