ECB policymakers pledge market stability but see big growth hit

FRANKFURT (Reuters) - The European Central Bank is ready to preserve financial stability in case of further market turmoil but the sector, including hedge funds, appears well prepared for the recent rout, ECB policymakers said on Wednesday.

Since U.S. President Donald Trump announced a raft of tariffs last week, stocks have fallen sharply, the dollar has weakened and U.S. Treasuries sold off overnight, raising fears of escalating market turmoil that could drag the world into a financial crisis.

"The Bank of France and the European Central Bank are fully mobilised to ensure the (euro zone) economy is well financed and (ensure) financial stability," French Central Bank chief Francois Villeroy de Galhau said.

"They are monitoring to make sure the financial system's liquidity is good, including in times of market stress."

Some economists fear that stress may be coming from so-called shadow banks, including hedge funds, which fall under easier regulation and do not have access to central bank liquidity facilities.

However, data so far indicate they are coping well.

"Market functioning so far has been preserved," said Klaas Knot, the head of the Dutch central bank and the chair of the Financial Stability Board.

"The hedge fund sector had already de-levered, they saw this coming. And so they were capable of meeting the margin calls, which was not the case in earlier episodes."

The tariffs are still likely to have a deep impact on the euro zone and sources close to the ECB say that growth is likely to take a far bigger hit than the half a percentage point earlier predicted.

The ECB is now revisiting its own economic models and could present fresh estimates at next week's policy meeting.

Some policymakers say that such a hit on its own would be enough to justify another rate cut next week, which would be the ECB's seventh in the past year.

"Since the March meeting, many of the risks identified at that time have now either materialised or are materialising," Finnish central bank chief Olli Rehn said in a speech.

"Based on the overall assessment of inflation and growth, I believe the case for further rate cuts at the April meeting has clearly strengthened."

Rehn spoke after a raft of policymakers, including Villeroy and ECB board member Piero Cipollone, had already argued for more policy easing.

Markets are now fully pricing in an April move and see another cut in June, to be followed by one or two more steps this year.

Jose Luis Escriva, head of the Spanish central bank, said it was too early to talk about recession, but the result of the U.S. tariff blitz would be a disruption of supply, "a very harsh one, which does have the potential to generate sharp falls in economic activity or a slowdown in economies like ours".

The ECB next convenes on April 17 but policymakers are also likely to hold informal talks later this week in Warsaw, on the sidelines of an informal gathering of central bank governors and finance ministers.

(Reporting by Balazs Koranyi, Francesco Canepa, Leigh Thomas, Essi Lehto, Anne Kauranen, Bart Meijer and Jesús Aguado; editing by Mark Heinrich)