In a speech, ECB Chief Economist Philip Lane said as coronavirus containment measures lifted, there were “some signs of an initial recovery”. But this process is expected to be “quite gradual”, since it will “take time for consumers and businesses to recover” from the coronavirus shock. Incomes losses and precautionary savings “continue to weigh on consumption”. Weak demand, continued supply constraints and ongoing social-distancing restrictions are “hampering the normalization of economic activity”.
He added that the net impact of the coronavirus shock on medium-term inflation outlook is expected to be “disinflationary to a substantial degree”. “Forces associated with greater economic slack are likely to outweigh any inflationary pressures stemming from damage to supply capacity”. The sharp drop in activity and fall in oil prices has “already left its mark” on Eurozone inflation.
On monetary policy tools, Lane said long term sovereign yields become “virtually unresponsive to rate cuts in stressed conditions owing to the subdued portfolio rebalancing effects”. Rate cuts are “unlikely to be as effective at the current juncture as they are in non-stressed conditions” . Policy that “directly intervene on sovereign yields may in fact become more effective. Hence, “evidence tilts the balance towards asset purchases as the more efficient tool in current circumstances.”
