Christine Lagarde, president of the European Central Bank, has said it is “ready to take appropriate and targeted measures” to address the economic impact of the coronavirus, signalling a growing willingness to intervene.
The statement by Ms Lagarde, issued on Monday night after an executive board meeting of the ECB, marks an escalation in the central bank’s communications about the deadly virus, which threatens to drag the eurozone economy into recession.
“The coronavirus outbreak is a fast developing situation, which creates risks for the economic outlook and the functioning of financial markets,” said Ms Lagarde, facing her first major test since she took over as ECB president in November.
“The ECB is closely monitoring developments and their implications for the economy, medium-term inflation and the transmission of our monetary policy,” she said. “We stand ready to take appropriate and targeted measures, as necessary and commensurate with the underlying risks.
The statement by Ms Lagarde follows similar statements from the US Federal Reserve on Friday and the Bank of Japan earlier on Monday after stock markets suffered their biggest fall since the 2008 financial crisis.
Last week, Ms Lagarde downplayed the likelihood of an imminent monetary policy response to the virus by the ECB, telling the Financial Times on Thursday that it was too early to determine if it would cause a “long-lasting shock” for the economy.
The ECB is still unlikely to cut interest rates from their already record low level of minus 0.5 per cent when its governing council meets on March 12. This reflects its concern about the side-effects of negative interest rates and a fear that cutting them further may do little to address the impact of the virus.
But the latest statement by Ms Lagarde — in particular her reference to “appropriate and targeted measures” — indicates that it is considering other ways to inject cheap money into the economy.
One such route would be to increase the cheap loans provided to banks in return for them meeting certain lending targets under the targeted longer-term refinancing operation (TLTRO) programme, which it relaunched last year. This could be done to give an incentive to bank lending to small businesses, which could be hit particularly hard by the disruption of the virus.
Even before the coronavirus started to upset the world economy, the eurozone had already slowed to its weakest growth rate since the bloc’s sovereign debt crisis seven years ago.
Now the virus has spread from China to other countries like Italy, South Korea and Japan, economists fear more disruption to supply chains, transport and tourism, piling pressure on the ECB to inject an extra dose of monetary policy stimulus.
Even before the latest statement by Ms Lagarde, investors were already pricing in a bet that the ECB would cut its main deposit rate from minus 0.5 per cent to minus 0.6 per cent as early as April.
