>> GROUP: Shadow ECB Council / EZB-Schattenrat  Andrew Bosomworth

Andrew Bosomworth: We expect the effect of the coronavirus to reduce real GDP growth by 0.2 percentages points to 0.7% this year, with the downward revision occurring primarily through the trade channel, followed by a rebound in growth to 1.4% in 2021. Our baseline projection for HICP is largely unaffected by the coronavirus, foreseeing inflation at 1.1% this year and 1.2% in 2021. We emphasize a higher degree of uncertainty to the forecasts than usual owing to the imprecision in predicting the potential spread of the virus. The coronavirus constitutes both a negative supply shock as well as a negative demand shock. While monetary policy can be effective against the latter, it is largely ineffectual against the former; and consequently we think the ECB should refrain from easing until more information is available about the spread of the virus as well as the nature of the shock presented by it. Were further easing be deemed necessary, we think this should primarily be implemented by raising the net purchases of bonds, for example to 40 billion per month, rather than cutting interest rates. We think further interest rate cuts will only prove detrimental for the transmission of monetary policy by weakening the banking sector and de-anchoring inflation expectations further away from the ECB’s definition of price stability. Beyond the ECB – and given the global nature of the shock – coordinated easing together with other central banks would likely prove more effectual than individual action, particularly if back by fiscal policy measures to boost demand.
>> Kontakt