World News

ECB plays down immediate action against economic impact of coronavirus

By Dhara Ranasinghe and David Milliken

LONDON (Reuters) – Four European Central Bank policymakers played down the prospect of immediate action to counter the economic impact of the coronavirus epidemic on Thursday, saying it was too early to gauge the long-term implications of the disease.

Concerns that the virus could send hard-hit countries such as Italy and potentially the wider euro zone back into recession have, in recent days, seen financial markets price in another modest ECB rate cut by the end of the year.

But ECB President Christine Lagarde and fellow policymakers Isabel Schnabel, Klaas Knot and Robert Holzmann all suggested the time for central bank action had not come yet.

“What we really need to understand when we are doing monetary policy is what are the potential medium-term implications, and at the moment this is unclear,” Schnabel, one of the bank’s Executive Board members, said during a speech in London.

Lagarde later told the Financial Times that ECB policymakers were “certainly not at (a) point yet” where the virus has caused a “long-lasting shock” while Knot said it was “too early to accurately measure the impact” of the pandemic.

Austrian central bank governor Holzmann, seen as a policy hawk who favours a tighter policy stance, went as far as saying he expected the hit to economic growth be limited to “tenths of a percent” and followed by a rebound.

The coronavirus, which first emerged in China, has seen a major outbreak in northern Italy over the last week, while Germany and France warned on Wednesday that it was likely to be the start of an epidemic.

The ECB has already pushed its interest rates to record lows and resumed a 2.6 trillion euro bond-buying programme to counter the fallout of a global trade war on its exporters.

The ECB is due to publish new economic forecasts at its next meeting in two weeks and ECB chief economist Philip Lane said late on Thursday that “more widespread contagion and a longer interruption in normal economic activity” posed a risks to the central bank’s near-term projections.

U.S. investment bank BofA cut its own world growth forecast on Thursday to the lowest level since the peak of the global financial crisis in 2009 and also chopped its European inflation projections – the area the ECB is mandated on.

Other data also showed that bank lending to euro zone companies was stuck at a two-year low last month even before the virus worries had reached current levels. This meant the ECB was unlikely to sit on its hands for much longer if the epidemic persists.

(Additional reporting by Francesco Canepa in Frankfurt; Editing by William Maclean and Grant McCool)