February 27, 2020 / 11:17 AM / a month ago

ECB signals rising worry over coronavirus spread

LONDON (Reuters) - Two top European Central Bank policymakers signalled growing worries about the coronavirus threat on Thursday, though there was no sign the bank was rushing to cut euro zone interest rates again.

FILE PHOTO: European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski

Concerns that the virus could send hard-hit countries like 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.

“All of us are very worried about what is currently happening with respect to the spread of the coronavirus,” one of the bank’s Executive Board members, Isabel Schnabel, said during a speech in London.

“But 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.”

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.

It comes after a year in which Europe has been hit by a bitter U.S.-China trade dispute and worries that some of its biggest sectors could be next in Washington’s crosshairs.

Klaas Knot, the head of the Dutch central bank and who is seen as one the ECB’s most hawkish members, also expressed his concerns in Amsterdam.

“Although it is still too early to accurately measure the impact of this pandemic, it is safe to say that the hit to the global economy will be more severe”, Knot said at a speech.

“SARS sent ripples across the global economy, wiping $40 billion off world equity markets. But since the SARS outbreak, China has grown from the world’s sixth largest economy, to the second biggest”.

The ECB is due to publish new economic forecasts at its next meeting in two weeks time. Though there is still much uncertainty over how the virus progresses, they are likely to acknowledge the virus impact.

BofA cut its 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.

“To my mind we currently do not have yet a sufficient understanding of what the medium-term implications are,” Schnabel said in panel discussion after her speech.

In response to a question on how monetary policy can respond, she added: “If it turns out that the coronavirus becomes more persistent...we cannot look through it.”

Reporting by David Milliken and Dhara Ranasinghe; Editing by Marc Jones, Peter Graff, William Maclean

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