ECB Joins Central Banks Pledging Virus Response If Needed

(Bloomberg) -- European Central Bank President Christine Lagarde belatedly joined the crowd of leading central bankers pledging to take action if needed against the economic damage from the coronavirus outbreak.

In a statement late Monday, Lagarde said the outbreak is a “fast-developing situation, which creates risks for the economic outlook and the functioning of financial markets.” That echoes communications by the U.S. Federal Reserve on Friday, and the Bank of Japan and Bank of England on Monday.

“The ECB is closely monitoring developments and their implications for the economy, medium-term inflation and the transmission of our monetary policy. We stand ready to take appropriate and targeted measures, as necessary and commensurate with the underlying risks.”

-- ECB President Christine Lagarde

Lagarde's remarks, little more than a week before the next policy meeting, reflect mounting concern that the coronavirus will further undercut the euro-area economy, which is already in a manufacturing recession and facing risks of trade tensions emanating from the U.S. and U.K.

Finance ministers from the Group of Seven will lead a global teleconference Tuesday to discuss their response to the economic threat posed by the coronavirus, said people familiar with the matter. The call will take place at 1 p.m. Paris time, according to the French finance minister's agenda, and the ministers will be joined by their central bank governors, the people said, on condition of anonymity to discuss the plans.

That could be the prelude to concerted action that might include a global series of interest rate cuts. Australia's central bank reduced the cash rate Tuesday by a quarter percentage point to 0.5%, a new record low. Malaysia's central bank cut its benchmark rate for the second time this year.

Investors were already speculating that the ECB will probably lower its deposit rate to a record-low minus 0.6% from the current minus 0.5% on March 12, with another cut of the same magnitude to come by the end of the year.

Yet the latest announcement coming after its peers also suggests doubts within the Frankfurt-based central bank that a rate cut is the best course of action. The reference to “targeted” measures may suggest alternative stimulus tools such as more-generous long-term bank loans.

Vice President Luis De Guindos said Monday that governments can offer a more fine-tuned response to the supply disruptions and demand shock that coronavirus brings.

“Fiscal policy is the correct answer,” he said in London. “We should not get confused. When you have a problem, you can't always look at central banks.”

ECB policy makers had a rancorous split over the last rate reduction in September and the decision to resume quantitative easing. More than half a decade of negative rates and 2.6 trillion euros ($2.9 trillion) of bond purchases have failed to bring inflation to the goal of just under 2%. Banks are complaining that their profit margins are being dangerously squeezed, and residents are fed up with surging house prices and depressed returns on their savings.

Lagarde and her colleagues have repeatedly warned that their ultra-loose policies have side effects. Yet her calls for higher government spending have been largely met with resistance.

“We think the ECB -- and the Bank of Canada -- will get bounced into joining a global shift, and the People's Bank of China will probably join too,” Krishna Guha, head of central bank strategy at Evercore ISI, said in a note. “But we see the ECB as the main drag on the feasibility, timeline and aggression of any joint response.”

To contact the reporter on this story: Paul Gordon in Frankfurt at pgordon6@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Robert Jameson, Michael S. Arnold

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