ECB's Nowotny says worried about euro zone economy

Credit: Reuters/Heinz-Peter Bader

European Central bank policymaker and head of the Austrian National Bank Ewald Nowotny addresses a news conference in Vienna July 1, 2014.

Asked about inflation and unemployment, he told reporters: 'I am concerned as well. What I have presented here is not a really great success story. We had expected an upturn in the euro zone and we have an upturn - 2014 is better than 2013 - but it is weaker than expected.'

The ECB is unlikely to take new policy action next week unless August inflation figures, due on Friday, show the euro zone sinking significantly towards deflation, ECB sources said this week.

Inflation in July fell to 0.4 percent, well below the ECB's target of nearly 2 percent.

Nowotny declined to discuss potential monetary policy approaches, citing the quiet period before an ECB rates meeting next week.

'I cannot give any exact numbers for the euro zone (as) we will have the (ECB) forecasts next week, but it is no secret that we are seeing the economy tend to cloud up,' he said late on Thursday.

He said he expected banks to make generous use of four-year loans the ECB will make available starting next month in a bid to spur bank lending.

'We expect this to be taken up to a great extent. I think any bank treasurer who does not grab some is making a serious mistake,' he said.

Nowotny, a member of the ECB's Governing Council, refused to be drawn into a debate about belt-tightening in Europe, saying policymakers had to consider both supply and demand.

'In my view the central issue at the moment is the demand side. We have massive unutilized resources,' he said, but that did not mean structural reforms should be put aside.

'No one intends to push a country that is in an economic downturn even deeper into the abyss.'

Nowotny is also governor of Austria's central bank, which cut its forecast for 2014 gross domestic product growth to 0.9 percent from the 1.6 percent it had seen as recently as June.

He said the sharp cut resulted from lower-than-expected investment, weak domestic demand and subdued exports given a downturn in neighboring Germany, its major trading partner.

'What is especially difficult and problematic for Austria is the development in Germany. For us this is really significantly more important than Ukraine and Russia, at least in the short term,' he said.

He played down the near-term impact of the Ukraine-Russia crisis on the Austrian economy, noting Austrian banks were operating normally in Russia and day-to-day business by companies was proceeding more or less normally.

'But what we see is that practically all investment projects are being stopped. That means the mid-term effects will no doubt much greater than the short-term ones because of the uncertainty. The effects can be clearly greater in 2015. They are not on such a massive order of magnitude for 2014.'

(Reporting by Michael Shields; Editing by David Gregorio)

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