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ECB warns of economic optimism even before Corona outbreak

20 Feb 2020 05:02 PM

ECB policymakers warned against pointing to further economic optimism at their January meeting, a view that has proved to be insightful now that hopes of a recovery have been dashed any time soon.

The Governing Council meeting was held from January 22 to 23 as trade tensions appeared to have subsided - with the announcement of the first phase of a U.S.-China agreement and some doubts about the decline of Brexit - and economic indicators showed signs of stability. While officials welcomed the data, they feared that the optimistic tone would increase market interest rates and reduce the impact of monetary stimulus.

Since then, economic reports have shown that the eurozone remains deeply stagnant, with the impact of Coronavirus on supply chains through the closure of factories in China. The single currency fell by nearly 4% against the dollar this year to its lowest level in nearly three years.

The ECB also warned of potential trade issues, saying the U.S.-China deal could cost the EU some exports as a result of "trade shifting," noting that the United States and the EU still face unresolved tariff issues. While Brexit was likely to go smoother after Prime Minister Boris Johnson's election victory, waiting for EU-UK talks, trade talks could result in more difference than previously expected.

Policymakers reiterated that they felt the need to assess the impact of current stimulus -- negative interest rates and the bond-buying program that was resumed last year -- "in light of the potential side effects." They said that the risks of financial stability should be closely monitored."

Renewed concerns about the eurozone economy have prompted market speculation that the ECB may need to add new stimulus, if it has room. Lagarde warned that a decade of crisis control had brought its solutions "substantially" over and urged governments to increase spending.

Separately, the ECB announced that it made a profit of 2.4 billion euros ($2.6 billion) last year, an increase of 790 million euros, mainly due to revenues from holding dollar-denominated assets and debt it buys under quantitative easing. Profits are distributed to national central banks, which means they actually go to the governments of the region.

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