By David Milliken
LONDON (Reuters) - Central banks face limits to how much they can dampen the economic impact of shocks such as the coronavirus epidemic, Bank of England deputy governor Jon Cunliffe said on Thursday.
Speaking alongside European Central Bank board member Isabel Schnabel - who said she was "very worried" about the outbreak - Cunliffe likened the coronavirus to other major shocks such as a disruptive Brexit.
"If it's a pure adverse supply shock, there is not much monetary policy can do," he said at a panel discussion hosted by Barclays in London.
Judging the right policy response to economic shocks that reduced both household demand and the economy's capacity to meet it was tricky, he added.
"In a disruptive shock, you won't know what is supply and demand for some time."
Global shares have lost more than $3 trillion in value this week alone and U.S. Treasury yields have hit a record low, as investors fear the spread of the virus and its effect on daily life as well as business supply chains.
Cunliffe said Britain had plenty of scope to loosen monetary policy and the government to relax budget policy if needed, and that there was no urgency to change Britain's overarching economic policy framework.
"I don't think one should reach for the panic button," he said.
Both the European Central Bank and the U.S. Federal Reserve are reviewing their policy structures in the context of low global interest rates.
"If we hit a big global shock, then one would want to use one's policy space - it is a risk management point - quickly, to avoid getting closer to a global liquidity trap. But that is if one hits that shock, rather than where we are at present."
Cunliffe said the BoE still expected British inflation to rise above its 2% target in the next two to three years. Domestic inflation was weak for now despite low unemployment, but that could reflect longer lags between a tight labour market and higher inflation, rather than an absence of any link.
Britain's government has the capacity to borrow more to support the economy if needed, especially as market interest rates are near record lows, he said.
However, low long-term interest rates in Britain and globally hinted at investor pessimism over long-run levels productivity growth as well as the risk of reduced global economic integration, he said.
(Reporting by David Milliken and Dhara Ranasinghe; editing by John Stonestreet)