ECB Chief Economist Philip lane said today that interest rate cut isn’t the most effective policy in the current situation. Nevertheless, further cuts remains an option if warranted by a tightening in financial conditions or a threat to inflation target.
He said, “a move in the short-term rate is typically most powerful if it is expected to be persistent, given the importance of the expectations channel in determining the influence of the short-term policy rate on the overall yield curve.” And, “this persistence channel is less relevant in the context of the spreading of the coronavirus”.
Nevertheless, ECB would “ensure that the elevated spreads that we see in response to the acceleration of the spreading of the coronavirus do not undermine transmission,” he added.
Bank of France head Francois Villeroy de Galhau also defended ECB’s lack of rate cut yesterday. He told Radio Classique, “our package is coherent as regards the economic analysis and is a powerful help for companies.”
Italy, the epicenter of coronavirus outbreak in Europe, is clearly dissatisfied with ECB’s move. Prime Minister Giuseppe Conte said yesterday. “Will they be enough? I don’t think so.” Conte said that the task of the ECB is “not hindering but facilitating” and that the institution needs to create “favorable financial conditions.”
