ECB’s Lane: Further Coronavirus Spread a Short-Term Downside Risk

1 March, 2020

By David Barwick - LONDON (EconoStream) – The European Central Bank’s staff forecasts may need to reflect the impact of the coronavirus if the spread of the latter is not contained quickly enough, according to ECB Executive Board member Philip Lane on Friday. Speaking at the Centre for European Reform, Lane, according to a text of his remarks made available by the ECB, echoed ECB President Christine Lagarde in assuring that monetary authorities were closely monitoring relevant information. “In terms of the macro-financial implications, the more quickly is the virus contained, the smaller will be the impact on the world economy and the faster will be the recovery,” said Lane, who is also Chief Economist of the ECB. “Conversely, more widespread contagion and a longer interruption in normal economic activity constitute additional downside risks to near-term projections.” It is thus a “priority” for the ECB to remain abreast of “the evolving situation,” he said. In his otherwise relatively brief remarks, Lane emphasized the decline in recent decades of the underlying real interest rate at which saving and investment are in equilibrium. Although the trend could eventually reverse, he said, the current downward pressure is a “significant” constraint on monetary policy. Feeble economic developments since the global financial crisis have compounded the problem, especially in view of the failure of fiscal policy in the euro area “until quite recently” to support domestic demand, he said. This constellation of factors has led to the ECB’s accommodative policy, which has averted the threat of deflation and is now fostering wage inflation, he said. “However, ongoing monetary accommodation is still required in order to ensure the robust convergence of price inflation to our aim,” he added. Although monetary policy is equipped to address too-high inflation relatively quickly, the current very different environment is less readily handled owing to policy constraints in the form of lower bounds, he said. Policy stimuli must thus be designed to prevent long-term expectations from coming unanchored and causing a further weakening of inflation dynamics, he said. In addition, when “policy rates are likely to rise only gradually over time,” he said, fiscal policy packs more punch than usual by both buffering against adverse shocks and shoring up inflation. With both interest rates and inflation low, there remain “many open questions,” he said. Against this backdrop, the ECB’s strategic review would be “an excellent opportunity to take stock, reflect on our experiences and listen to a wide range of external voices.”