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Intesa Sanpaolo : COVID-19 will force the ECB to cut growth and inflation forecasts in 2020.

Intesa Sanpaolo : In addition, financial conditions have tightened sharply in recent weeks, linked to the surge in risk aversion on the markets and the currency effects of the rate cut in the United States.

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Weekly Economic Monitor – 06 March 2020

Intesa Sanpaolo – Research Department


In light of forward guidance, this may be sufficient to justify a relaxation of monetary policy.

The press release of March 2 seems to prepare the markets for this eventuality. Markets take a (useless) cut in the deposit rate for granted, which could be accompanied by an increase in the exempt share of the reserve. In reality, there is little that monetary policy can do to address the specific issue. If there is some action in the next days, the reason will be the panic that has swept the markets.

The US joined the rest of the world by being swirled into the COVID-19 vortex. Although the spread of the coronavirus in the national territory is only at the beginning, the policy responses have been, as usual, faster than in the rest of the world, with extraordinary measures approved both by the central bank and by Congress.

The Fed has shown, once again, to be nimble in dealing with emergency situations and, with a short press release, has cut rates by 50 bp, leaving the door open to act in the future “as appropriate” to support the economy in the face of the risks generated by the COVID-19. Congress approved a $ 8.3 billion spending package, which could be strengthened with further action.

The week’s market movers

In the euro area, the main event of the week will be the ECB meeting, with markets expecting some policy reaction. January data on industrial output in the three major economies, as well as the Eurozone average, should outline a widespread rebound, after the December plunge (also due to calendar effects); however, the recovery could prove short-lived as, starting in February, and more markedly in March, the effects of the spreading of COVID-19 throughout Europe will become visible. The second reading of Eurozone GDP should confirm the first estimate, i.e. a slowdown to 0.1% q/q in the closing quarter of 2019; the cycle’s loss of steam could deepen in the first half of 2020.

This week only a few noteworthy releases are lined up in the United States . The February CPI and PPI are expected to show an increase of the core indices by around 0.2% m/m, with some downside risk concentrated in the sectors that may have felt the effects of the coronavirus (airfares and hospitality). Consumer confidence as surveyed by the University of Michigan in March (prel.) is expected to deteriorate significantly, mostly due to the forward-looking component, as a result of the correction of stock indices and of the spreading of the COVID-19 epidemic. However, weakening confidence should be, at least in part, offset by the fed funds rate cut.


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