Two of Europe’s most senior central bankers have said they are closely monitoring the economic impact of the coronavirus and stand ready to act if needed, while stressing the need for “cool heads” and downplaying the chances of imminent action.
Luis de Guindos, vice-chairman of the European Central Bank, said on Monday that the coronavirus had “added a new layer of uncertainty to global and euro area growth prospects” that could have a negative impact “through both demand- and supply-side channels”.
Mr de Guindos said the ECB remained “vigilant and will closely monitor all incoming data,” while underlining its standard guidance that it “stands ready to adjust all its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.
François Villeroy de Galhau, governor of the Banque de France, said in a radio interview on Monday that it was a time for “cool heads”, while adding: “We are vigilant, we are mobilised, but we will remain calm and proportionate in the responses that must be provided.”
Mr Villeroy, who is a member of the ECB governing council, said monetary policy was most effective in supporting demand and the coronavirus has so far mainly hit the supply side of the economy. “Today, on the demand side, it is limited to certain sectors, where the effect is very significant, [but] it is not yet a widespread slowdown in consumption,” he said.
The ECB’s governing council is due to meet to decide monetary policy next week. Christine Lagarde, its president, told the FT last week that it was too early to determine whether the virus represented “a long-lasting shock” that would impact inflation.
However, investors are pricing in a bet that the ECB will cut its main deposit rate from minus 0.5 per cent to minus 0.6 per cent as early as April.
Economists have been rushing to slash their growth forecasts for the eurozone economy this year, especially since the virus spread to several European countries, with Italy hit by the largest number of cases outside of Asia.
Mr de Guindos said the disruption to travel, transportation and the supply of goods from Chinese producers “may affect euro area exports, and could cause disruption in global supply chains and the production of intermediate products”.
“The euro area services sector, too, could be affected by travel disruptions,” he said, while adding: “If the virus spreads more widely, domestic firms could be more directly affected due, for example, to supply chain delays.”
The ECB on Monday announced that it had postponed a conference jointly organised with the European Commission on capital markets union that it had been due to host at its Frankfurt headquarters on Tuesday.
“Several cancellations by conference participants and otherwise increasingly challenging travel logistics have made it preferable to defer a physical meeting for now,” the ECB said.