Europe's increased defence spending to prop up growth, ECB's Rehn says

FRANKFURT (Reuters) -Euro zone economic growth is already taking a hit from the Trump administration's trade war but the expected surge in defence spending at home could prop up growth, European Central Bank policymaker Olli Rehn said on Tuesday.

The euro zone economy has been broadly stagnant for the past two years and there is a growing body of evidence that fears over a full-blown trade war with the U.S. is already holding back corporate investment and keeping consumers cautious.

The Trump administration's reduced support for Ukraine also places an additional burden on the bloc, which has pledged to finance much of Ukraine's effort to defend itself against Russia.

"Although there is little to be positive about in the security situation in Europe, the expected increases in defence spending and investment are at least likely to support GDP growth over the medium term," Rehn told an MNI webinar.

This boost could be very welcome since the overall outlook was already subdued before trade measures from the U.S.

"U.S. tariffs and increased uncertainty are already having adverse effects on (the) economic growth outlook in the euro area in the immediate and near term," Rehn added.

While the ECB cannot solve Europe's competitiveness issues, Rehn argued that its six rate cuts since last June create "welcome room for manoeuvre" for households and companies.

He declined to pledge any further cuts, arguing that the outlook is uncertain and the ECB needs to keep its options open.

Still, offering a modest hint that the ECB may not yet be done, Rehn argued that inflation was steadying at the ECB's target and was developing "pretty much" in line with forecasts.

"Inflation in the euro area is stabilising at the ECB's 2% target," Rehn said. "Risks to the inflation outlook are two-sided."

The ECB's own projections, referred to by Rehn, embed several more rate cuts this year, provided that the economy and inflation develop along the baseline projection.

(Reporting by Balazs Koranyi, Editing by Louise Heavens and Susan Fenton)

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