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ECB running out of room to fight global threats: Lagarde

Brussels

EUROPEAN Central Bank president Christine Lagarde said a decade of crisis fighting has left policy makers with few options for more monetary stimulus, just as new concerns such as the coronavirus outbreak arise.

Ms Lagarde said that while the euro zone's domestic economy remains "resilient", lingering global threats could undermine the recent stabilisation in activity, and uncertainties remain elevated. The warning came just hours after data showed a huge drop in Germany factory orders, indicating the manufacturing recession in Europe's largest economy is far from over.

Fundamental economic trends and "the legacy of the financial crisis have driven interest rates down", Ms Lagarde told European Parliament lawmakers on Thursday. "This low interest rate and low inflation environment has significantly reduced the scope for the ECB and other central banks worldwide to ease monetary policy in the face of an economic downturn."

The reference to "significantly" reduced space was stronger than the ECB's statement late last month, when it announced a strategic review into the reasons for low inflation and how to tackle it.

It's partly an acknowledgment of rising concern that the loose policy threatens financial stability by squeezing bank margins and driving asset prices - such as stocks and real estate - to unsustainable levels.

Ms Lagarde's message was also aimed at governments though - signalling that they need to step in with fiscal support. "We have indicated clearly that where there is fiscal space it would be appropriate for policy makers to actually use that fiscal space in order to support the euro-area economy," she said, while declining to name specific countries.

The coronavirus outbreak has become the most immediate concern for some central bankers. The Bank of Thailand on Wednesday cut its key interest rate to a record low, and the Philippine governor hinted a similar move was imminent there.

Ms Lagarde said a day earlier that the outbreak has added to economic uncertainty, as did executive board member Philip Lane, the ECB's chief economist. Mr Lane's predecessor, Peter Praet, told Bloomberg Television on Thursday that the ECB should be wary of rushing in too soon though.

"What worries me probably more - the sort of of perception you know, especially in financial markets, that central banks always have to react," he said.

"Every time you get a shock in the system you get high expectations of a reaction of the central bank that's quickly incorporated in market expectations. But there's only so much a central bank can do."  BLOOMBERG