By Francesco Canepa and Francesco Guarascio
FRANKFURT/BRUSSELS (Reuters) – The European Central Bank does not need to take immediate action in response to the coronavirus epidemic, two ECB policymakers said on Friday, confounding market bets on a rate cut.
The central bank governors of Germany and Lithuania joined a number of fellow ECB rate setters in playing down the chances of a policy move in response to the epidemic, which is spreading to the euro zone after killing nearly 2,900 people in China.
“This is a very complex monetary policy issue which, in my view, does not require acute monetary policy action,” Bundesbank President Jens Weidmann said in Frankfurt.
His Lithuanian colleague Vitas Vasiliauskas had said earlier the ECB had taken a “wait and see approach” and no action was expected at a policy meeting on March 12.
But he added there was “no problem for the Governing Council to meet in some extraordinary way, not to wait until” the following gathering on April 30. [.]
Investors were ramping up expectations for an ECB rate cut as early as June on fears that coronavirus, now spreading to a number of European countries, could tip the world economy into recession.
Weidmann echoed a number of ECB rate-setters in saying it was too early to gauge the economic fallout of the epidemic.
But he acknowledged the Bundesbank’s prediction of a 0.6% GDP expansion this year, which had already been halved from the previous forecast, may be out of date.
“All in all, economic growth this year could come in slightly lower than our experts estimated in December,” Weidmann said.
China is Germany’s top source of imports and its third-largest export market.
Weidmann merely acknowledged that the latest events were lengthening the odds on a rate increase, previously expected for 2022. But he said the ECB should “not lose sight of the exit” from its ultra-easy policy of massive bond purchases and negative rates.
“The Governing Council must not lose sight of the exit from loose monetary policy,” he said. “For the very loose monetary policy is also associated with risks and side effects.”
He also criticized the notion of raising the ECB’s inflation target, saying its current formulation as a rate of price growth “below but close to 2%” was “understandable, forward-looking and realistic”.
(Additional reporting by Frank Siebelt, editing by Larry King)