central banks

ECB shouldn’t be ‘shy’ in virus fightback – board member

Agence France-Presse

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'The risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy to react and the worst-case scenarios materializing,' says Fabio Panetta

The European Central Bank (ECB) shouldn’t worry about being too proactive in its monetary policies to combat the economic impact of the coronavirus pandemic, executive board member Fabio Panetta said on Tuesday, September 22.

“The risks of a policy overreaction are much smaller than the risks of policy being too slow or too shy to react and the worst-case scenarios materializing,” Panetta told a forum in Frankfurt. 

The Italian economist, 61, said the ECB’s ultra-loose monetary policy had done much to remove “adverse tail risks,” but that the economic situation “remains fragile and uncertain and the projected inflation path is still clearly short of our aim.”

Panetta said the recent rise of the euro against the dollar had “offset” some of the ECB’s policy measures and needed to be watched “closely” for its impact on inflation.

The ECB targets inflation at below, but close to, 2%.

But price growth has been stubbornly low for years and a soaring euro risks dampening inflation even more as it makes imports cheaper, keeping the lid on consumer prices, while hurting eurozone exporters.

Panetta’s comments hint that the Frankfurt-based institution might increase monetary stimulus before the end of the year, as some observers anticipate.

Panetta argued that the ECB “must remain forward-looking” in adapting its monetary policy, rather than responding to current or previous conditions.

The economist is positioning himself as “a clear successor of (former ECB chief) Mario Draghi by insisting on the need for the ECB to be forward-looking and proactive in the face of large downside risks to the economic outlook,” according to Frederik Ducrozet, a strategist at Pictet Wealth Management.

In the summer of 2014, when the eurozone economy was in a slump, Draghi said that the risks of “doing too little” outweigh those of “doing too much” in a speech at a central bank conference at Jackson Hole in the United States. 

A few months later, the ECB launched a massive quantitative easing (QE) program, buying up government and corporate bonds totaling more than 2.8 trillion euros ($3.3 trillion) to date.

The coronavirus prompted the ECB, now led by Christine Lagarde, to pump more liquidity into the financial system through a “pandemic emergency” bond-buying scheme with an envelope of 1.35 trillion euros.

With fears growing over a sharp uptick in coronavirus cases across Europe and the potential impact on the eurozone’s rebound, analysts expect the ECB to extend or enlarge the emergency stimulus scheme in December. – Rappler.com

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