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
But there is still room to cut rates further if needed
BOJ will not hesitate to ease further if needed
BOJ has many tools, measures to deploy if needed
Does not think that price target will be met soon
BOJ may have to continue easing in the coming years
Financial system remains stable
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
CNBC reports that according to Deputy Governor for Monetary Policy Ben Broadbent, the U.K. may be headed toward negative interest rates at impending Bank of England monetary policy meetings.
The BOE's Monetary Policy Committee (MPC) voted to hold interest rates at a historic low of 0.1% last Thursday, having cut rates twice from 0.75% since the start of the coronavirus pandemic.
"The committee are certainly prepared to do what is necessary to meet our remit with risks still to the downside," Broadbent told CNBC on Tuesday.
"Yes, it is quite possible that more monetary easing will be needed at the time."
Along with the two previous rate cuts, the Bank has also announced £200 billion of new quantitative easing, bringing its bond buying program to a total of £645 billion.
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
We will continue to come up with appropriate responses
BOE is clearly committed to take action when needed
Appropriate that BOE continues with aggressive pace of QE for the moment
We will take stock of that, there's still another meeting before QE completion
Information about lifting lockdown measures will be material to June discussions
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
The Bank of England's Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. In that context, its challenge is to respond to the severe economic and financial disruption caused by the spread of Covid-19.
At its meeting ending on 6 May 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%.
The Committee voted by a majority of 7-2 for the Bank of England to continue with the programme of £200 billion of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to take the total stock of these purchases to £645 billion.
Two members preferred to increase the target for the stock of asset purchases by an additional £100 billion at this meeting.
The spread of Covid-19 and the measures to contain it are having a significant impact on the United Kingdom and many countries around the world.
Activity has fallen sharply since the beginning of the year and unemployment has risen markedly.
Economic data have continued to be consistent with a sudden and very marked drop in global activity.
Oil prices have been volatile.
There have, however, been tentative signs of recovery in domestic spending in China, and this is likely to be echoed in other countries that have started to relax Covid-related restrictions on economic activity.
Financial markets have recovered somewhat over recent weeks and risky asset prices have picked up from their lows in mid-March. This in part reflects the actions taken by authorities in the United Kingdom and elsewhere. Global financial conditions have, nevertheless, remained tighter than prior to the outbreak of Covid-19.
The timeliest indicators of UK demand have generally stabilised at very low levels in recent weeks, after unprecedented falls during late March and early April.
Payments data point to a reduction in the level of household consumption of around 30%.
Consumer confidence has declined markedly and housing market activity has practically ceased.
CPI inflation declined to 1.5% in March and is likely to fall below 1% in the next few months, in large part reflecting developments in energy prices.
ECB needs to discuss how to offer certainty to the court
ECB hasn't yet discussed whether to buy junk bonds
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