The euro zone’s economic slowdown is not “temporary,” said the Governor of the Bank of Finland and member of the European Central Bank Olli Rehn in an interview with the German newspaper Boersen Zeitung published on Thursday.
Incoming data confirm Rhen’s view. German factory orders fell by 2,2% in May and 8,6% (!) year on year, amid a global trade slowdown. One in five German jobs depend on exports and foreign orders dropped by 4,3% in May. Global trade has been hit by the US-China trade war and Brexit uncertainty.
Olli Rehn suggests that as a rebound does not appear imminent, the ECB should move to provide further monetary stimulus. “We should no longer see the recent slowdown in growth as a brief temporary dip in the economy, as a ‘soft patch’,” Rehn said, pointing to falling and persistently low inflation.
ECB President Mario Draghi has already made clear his own position, but he is not going to be in charge of monetary policy in the coming months. Lagarde is seen as likely to maintain a fiscally expansive policy.
Rehn was an aspirant candidate to succeed him until Christine Lagarde was signalled out for the top job. Rehn is openly proposing cutting the current deposit rate from 0% to minus 0.4%. The next ECB Board meeting is on July 25 and then on Sept. 12.
The market is expressing uncertainty as investors appear to be looking for low-risk assets, like Germany’s benchmark Bund, which touched a fresh record low minus 0,403% on Thursday. Italian debt continues to rally, with Italy’s benchmark 10-year yielding 1.563%.