Reuters reports that European Central Bank Governing Council member Ignazio Visco said on Friday policy makers had to act to head off deflationary risks brought about by the sudden halt to economic activity during the coronavirus crisis.
Visco, who is also governor of the Bank of Italy, said disinflationary pressures could be strong and persistent, threatening economies where already high levels of public debt are growing massively during the crisis.
Presenting the Bank of Italy's annual report, he said the ECB was ready to use all the instruments available to ensure that all sectors of the economy could benefit from accommodative financing conditions.
"Steps must be taken to counter the significant risk of low inflation and the marked fall in economic activity from translating into a permanent reduction in expected inflation or into the possible resurfacing of the threat of deflation," he said.
"Also as a result of the high levels of public and private debt in the euro area as a whole, this could trigger a dangerous spiral between the fall in prices and that in aggregate demand."
CNBC reports that the vice president of the European Central Bank (ECB) has backed the unprecedented stimulus packages launched in the region, saying there were no alternatives for lawmakers.
Governments from euro area countries have passed major stimulus efforts in a bid to soften the impact of the coronavirus crisis and keep people in work. Fiscal deficits are expected to widen, debt piles will climb and the financial repercussions could be felt for generations.
However, Luis de Guindos, the vice president of the euro zone’s central bank, said the issue of lofty debt levels needs to be put into perceptive.
“At the end of the pandemic for sure that we will have higher public debt ratio. But the alternative of doing nothing is much worse,” he told CNBC’s Annette Weisbach when asked specifically about Italy.
“It would be much worse in terms of the crisis. And it would be much worse in terms of the recovery phase,” he added.
The ECB vice chief said that concerns over public finances in the medium term will have to be addressed. But for now, he called for “powerful and strong” fiscal responses at both the national and pan-European level.
It is very hard to forecast how badly the economy has been affected
Economic contraction now seen somewhere between 'medium' and 'severe' scenario
ECB had to resort to exceptional measures to make sure there is plenty of liquidity
ECB primary objective is to ensure price stability
Reuters reports that the coronavirus-hit euro zone economy probably will not return to its pre-pandemic levels until next year at the earliest, the European Central Bank's chief economist told El Pais newspaper, adding that the ECB was prepared to tweak its tools if needed.
"From today's perspective, it looks in any case unlikely that economic activity will return to its pre-crisis level before 2021, if not later," Philip Lane said in the interview published on the ECB's website.
Lane said the ECB was constantly monitoring the situation and was ready to adjust all of its instruments if that proved necessary. He added that the ECB's Pandemic Emergency Purchase Programme, also known as PEPP, could be adjusted.
He said the ECB was analysing the situation ahead of the upcoming June meeting, adding: "If we see that financial conditions are too tight, or the pressure on individual bond markets is not reflecting economic fundamentals, we can adjust the size or duration of our purchases, which we can anyway allocate flexibly over time and market segments."
The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime.
Measures to contain the spread of the coronavirus (COVID-19) have largely halted economic activity in all the countries of the euro area and across the globe.
Euro area GDP could fall by between 5% and 12% this year, depending crucially on the duration of the containment measures and the success of policies to mitigate the economic consequences for businesses and workers.
As the containment measures are gradually lifted, these scenarios foresee a recovery in economic activity, although its speed and scale remain highly uncertain.
The variability depends on the duration of lockdown measures, success of policies
Headline inflation is likely to decline further in the coming months
An ample degree of monetary accommodation is necessary for the robust convergence of inflation to levels that are below, but close to, 2% over the medium-term
EU governments are not matching the ECB's efforts
EU fiscal response to the crisis is inadequate
Not opposed to increasing PEPP size, but decision should be based on data
No urgency to increase purchases, must examine how easing of lockdown measures are impacting the economy
ECB measures form a powerful package
Rating downgrades may be a risk to policy discussion
ECB has not discussed impact of rating downgrades on purchases
ECB constantly monitoring the situation
ECB policy has provided crucial support to the economy
Inflation will likely fall further in the next few months
PEPP helping to forestall undue tightening of financial conditions
Fiscal actions are the first line of defense
ECB needs to discuss how to offer certainty to the court
ECB hasn't yet discussed whether to buy junk bonds
Germany is in a severe economic recession
Economy can recovery sustainably once the pandemic has been overcome
Should not lose sight of eventual exit from stimulus measures
2020 GDP growth forecast -5.5% (previously +1.1%)
2021 GDP growth forecast +4.3% (previously +1.2%)
2022 GDP growth forecast +1.7% (previously +1.4%)
2020 inflation forecast +0.4% (previously +1.2%)
2021 inflation forecast +1.2% (previously +1.4%)
2022 inflation forecast +1.4% (previously +1.5%)
Euro area real GDP could fall by around 5% (mild scenario), 8% (medium scenario), and 12% (severe scenario) this year
Under the severe scenario, Q2 quarterly real GDP growth could be -15%, followed by a protracted and incomplete recovery; +6% in Q3, +3% in Q4
Under the severe scenario, real GDP is expected to remain well below the level observed at the end of 2019 until the end of 2022
Bloomberg reports that Bundesbank President Jens Weidmann praised euro-area governments for providing "significant, impressive" spending in the fight against the coronavirus, but warned that they'll need to tighten their budgets once the emergency has passed.
The German central banker told Bloomberg in an interview by email that the economy will need broad support for some time. He also argued that "the pandemic plainly shows how important a solid fiscal policy is."
"An extremely expansionary fiscal stance cannot be sustained permanently," he said. "Going forward, then, all countries will have to focus on reducing the very high debt ratios and ensuring acceptance in the capital markets, and to do this in a way that is compatible with our fiscal rules."
The comments strike at the heart of the debate over how Europe should handle the aftermath of the coronavirus, with governments across the 19-nation bloc pledging hundreds of billions of euros to support small businesses and compensate for lost wages.
"It is not yet possible to say for sure whether the measures taken to date will be enough," said Weidmannl. "Monetary policy is making a major and important contribution within the scope of its mandate, and will continue to play its role."
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