MNI POLICY: Virus Hit To Eurozone Growth Unclear-Schnabel

By Luke Heighton and David Robinson

     FRANKFURT (MNI) - The implications of the coronavirus on the medium-term

growth outlook are unknown, ECB Executive Board Member Isabel Schnabel said

Thursday.

     Here are the key points from the speech in London and subsequent Q&A:

     --"The dramatic events around the spread of the coronavirus have increased

uncertainty about the global growth outlook," Schnabel said, "and also the

outlook for the euro area. But very little is yet known about the potential

medium-term implications."

     --The numerous shocks that have hit the euro area over the past few years

have been different in nature, size and persistence. Therefore, for the ECB "the

length of the 'medium term' - which is an integral part of its definition of

price stability - will vary over time," Schnabel said, while depending also on

the speed and scope of the transmission of monetary impulses to prices and

wages.

     --"At least" two structural factors - the changed role of energy inflation

and the cushioning effect of higher profit margins - have weighed on underlying

price pressures," Schnabel said. "Such sizeable and persistent supply-side

shocks pose a dilemma for central banks," she said. "On the one hand, they call

for a lengthening of the horizon over which the ECB should steer inflation back

to its aim. On the other hand, central banks are limited in the extent to which

they can ignore such shocks without risking a destabilisation of inflation

expectations."

     --"This trade-off," she continued, "is particularly stark in the vicinity

of the effective lower bound, where attempting to further shorten the horizon by

easing financial conditions carries the risk of shifting the balance of the

costs and benefits of a highly accommodative monetary policy stance by

increasing risks to financial stability."

     --It is therefore "imperative for central banks to have a solid

understanding of the potential risks of second-round effects, which includes a

thorough assessment of how, and which, inflation expectations affect actual

inflation outcomes, as well as of the side effects of unconventional monetary

policy measures, in particular as regards financial stability."

     --"These efforts will be an important part of the ECB's ongoing strategy

review."

     --The ECB has not hit the reversal rate, or effective lower bound, on

policy, Schnabel said, adding that in any case the reversal rate was not a

single, enduring point which the ECB can discover.

     She cited research by Markus Brunnermeier which suggests that the reversal

rate changes through time due to various factors.

     Schnabel also said that the question of defining the reversal rate was not

part of the ECB policy review, but a separate issue.

     --Asked about changing inflation measures in the euro area she said that

she was strongly opposed to incorporating asset prices.

     She was, however, more sympathetic to incorporating rental costs as a way

of reflecting housing costs. The difference between rental and other measures of

housing costs "was not that dramatic" so making such a change may do little to

headline price measures.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$X$$$,MT$$$$,M$$EC$]