A sustained period of low activity reduces labour productivity, weakens corporate balance sheets and saps confidence, leading to a potential downward spiral, Lane said in a speech to the Spring workshop of The European House - Ambrosetti.
“There is a clear risk of self-fulfilling adverse dynamics taking hold, through which uncertain economic prospects induce households, firms and governments to hold back on expenditure plans, leading to a decline in overall demand that validates the loss in confidence about the future,” he said.
Hoping to prop up the economy until it is ready to reopen, the ECB has pushed borrowing costs to record lows through copious asset purchases and loans to banks at rates as low as minus 1%.
“To counter these risk factors, it is essential that the ECB acts as a stabilising force and boosts confidence by committing to the preservation of favourable financing conditions,” Lane, a chief architect of the ECB’s crisis response, said. Reporting by Balazs Koranyi; Editing by Jan Harvey