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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
     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
     --"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
     --"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
     --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:
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$X$$$,MT$$$$,M$$EC$]

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