The top central banker for the 19 European Union countries that use the euro currency said there was a risk that fearful consumers could drag out the rebound, and that governments and central banks will need policies that bridge the gap until vaccination is widespread.
“We are seeing a strong resurgence of the virus and this has introduced a new dynamic,” she said in a speech opening an online ECB conference on monetary policy. “While the latest news on a vaccine looks encouraging, we could still face recurring cycles of accelerating viral spread and tightening restrictions until widespread immunity is achieved.”
She said “the recovery may not be linear, but rather unsteady, stop-start and contingent on the pace of vaccine roll-out. In the interim, output in the services sector may struggle to fully recover.”
Stock markets jumped after Pfizer said Monday that early results from tests of its experimental vaccine suggests the shots may be a surprisingly robust 90% effective at preventing COVID-19. The European Commission has said it plans to secure up to 300 million doses of the experimental vaccine developed by Pfizer and BioNTech. Several experimental COVID-19 vaccines are in late stage testing, but none have so far been proven safe and effective enough to use broadly.
The eurozone economy rebounded a strong 12.7% in the July-September quarter amid stimulus efforts by the ECB and governments, and as infection numbers receded from the earlier part of the year. But in recent weeks the number of infections has been rising across Europe, leading to predictions that the recovery will go into reverse in the last three months of the year with falling economic output.
Lagarde said policymakers must ensure that the exceptional downturn remains a one-off blow to the economy and does not turn into a recession that feeds on itself. If that happens, “we could see more lasting changes in behaviour than during the first wave,” she said. “Households could become more fearful about the future and increase their precautionary saving. Firms that have survived up to now by increasing borrowing could decide that remaining open no longer makes business sense.”
At the central bank’s last meeting on Oct. 28 Lagarde said there was “little doubt” that the monetary authority for the 19 countries that use the euro would step up its stimulus efforts at its Dec. 10 meeting. Analysts have been predicting more stimulus as a renewed increase in virus infections and partial lockdowns weigh on economic growth. Inflation was at minus 0.3% in October and continues to lag the ECB’s goal of below but close to 2%.
Lagarde said Wednesday that the current 1.35 trillion-euro ($1.58 trillion) bond purchase program and cheap loans to banks are “likely to remain the main tools” to help the economy as it prepares to offer more stimulus in December.
Lagarde said that “while all options are on the table,” the bond purchase program and offers of long-term credit to banks – in some cases carrying a negative interest rate that pays the banks to borrow – had proven effective and could be adjusted as the pandemic evolves.
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