‘Euro-area economy closer to ECB’s worst-case estimates’

Bloomberg

The euro-area economy is facing a contraction this year in line with the European Central Bank’s (ECB) more pessimistic forecasts, according to
Christine Lagarde.
Output in the region is likely to shrink between 8% to 12%, the ECB president said in an online question-and-answer session targeted at European youth. Estimates for a mild
scenario are “out of date.”
“We’ll have a better sense in a few days as we publish our numbers in early June, but it’s likely we will be in between the medium and severe scenarios,” she said.
The ECB is due to update its official projections for growth and inflation next week, when the Governing Council also
decides on policy.
Europe’s economy is facing its worst crisis since World War II after businesses were forced to close in light of the coronavirus pandemic, costing the region hundreds of thousands of jobs so far. In March, the central bank launched a 750-billion euro ($822 billion) emergency asset-purchase program to support borrowing costs, and may increase it next week.

‘ECB can boost stimulus if outlook warrants’
The ECB is ready to expand any of its instruments if it judges that the medium-term inflation outlook has worsened, Executive Board member Isabel Schnabel said.
“If we judge that further stimulus is needed, the ECB will be ready to expand any of its tools in order to achieve its price stability objective,” Schnabel said in an interview with the Financial Times published on the ECB’s website. “With respect to the Pandemic Emergency Purchase Programme, this concerns the size but also the composition and the duration of the program. We are ready to react to new data coming in.”
The central bank’s Governing Council is seen as increasingly likely to increase the size of its emergency asset purchase program when it meets next week. Officials have debated need to remove a constraint on its bond buying that ties purchases to the size of the euro’s constituent economies.
Schnabel, a German national, said the ECB was not adjusting its monetary policy in response to a recent German constitutional court ruling against a previous bond-buying program. She added that she did not think the Bundesbank will be forced to stop participating in the program.
“We are in a monetary union, and Germany and the Bundesbank are an important part of that,” she said. “We have to avoid a situation in which
one national central bank
cannot participate in our asset
purchase programs.”
The central bank has a duty to counter a rapid divergence in bond spreads of euro member countries if they point toward market dysfunction, Schnabel said. That doesn’t mean the ECB targets specific spreads for those countries, she said.
“If we see that there is an unwarranted tightening of financial conditions that is not consistent with our price stability objective, the ECB will react,” she said. “You can, for example, look at the funding conditions for corporates or liquidity indicators.
Most of them have gone down quite substantially in response to our policy measures but they are still elevated compared to the pre-crisis period. This shows that we are still not in a stable situation and that we have to continue to act forcefully.”