The ECB is keeping its feet still on monetary policy – and is doing nothing against the appreciating euro. That drives the exchange rate further.
Dhe European Central Bank (ECB) did not increase its billion dollar bond purchase program at its meeting on Thursday, nor did it announce any new steps to combat the crisis. Nonetheless, in the press conference that followed, ECB President Christine Lagarde made a point of commenting on the strong exchange rate of the euro against the dollar. Since last week, when the exchange rate passed the $ 1.20 mark, there has been speculation about reactions from the ECB.
Shortly before Lagarde’s statements on Thursday, the Bloomberg news agency reported with reference to “informed people” that the ECB saw no reason for an overreaction to the recent rise in the euro. The euro reacted with significant gains and at times rose to more than 1.19 dollars.
Lagarde himself said that the central bank does not have an exchange rate target and thus does not pursue an exchange rate policy, but is nevertheless closely monitoring the development of the exchange rate because this could have an impact on the development of prices in the euro area, for example via import prices. “We need to watch the matter closely,” said Lagarde.
Meanwhile, the central bank raised its projections for economic development this year slightly. In its base scenario, the ECB is now assuming an 8 percent decline in gross domestic product this year. In June, the monetary authorities had forecast a drop of 8.7 percent. The economy will grow by 5 percent in 2021 (June forecast: 5.2 percent).
The ECB expects growth of 3.2 (3.3 percent) in 2022. According to estimates by the central bank, the inflation rate is likely to be 0.3 percent this year, as predicted in June. For the year 2021, the monetary authorities expect an annual price increase of 1 percent (0.8 percent) and for the year 2022 still 1.3 percent.
Lagarde described the increased number of corona infections in the summer as a “headwind” for the short-term growth prospects in the euro area. The planned recovery is continuing in industry, but has weakened in the service sector.
Despite the negative inflation rate of minus 0.2 percent in August, the ECB President does not expect the price trend in the euro zone to slide into a deflationary spiral. This slipping was definitely a “wake-up call” for some. However, it is a temporary phenomenon, an outlier. The oil price, which has been low since April, has depressed inflation. Food prices even rose significantly at times during the crisis. Most recently, the reduction in VAT in Germany and a postponement of seasonal sales in two euro countries have also depressed the inflation rate.
Discuss inflation target
Lagarde also discussed the plans of the US Federal Reserve (Fed) to operate “average inflation targeting” in the future, ie to tolerate exceeding it for a while after falling below the inflation target of 2 percent for a long time. Lagarde indicated that there are differences between the Fed and the ECB, so the Fed has a double goal and is not only looking at price stability, but also at unemployment. Nevertheless, the ECB will also talk about its inflation target in the course of its “Strategic Review”, its discussion of the strategic realignment. “The inflation target will be an issue at our next webinar on September 23,” said Lagarde. It is a “cornerstone” of the new strategy without wanting to anticipate the debate.
Lagarde also commented on the Brexit negotiations between the European Union and Great Britain. The ECB is not in the “driver’s seat” in the negotiations, but is following them carefully, said the ECB President. She hopes that the talks will lead to a positive outcome, also with a view to the economic risks that a hard Brexit would entail.
First reactions from economists were mixed on Thursday. Friedrich Heinemann from ZEW in Mannheim described the wait-and-see attitude of the ECB as serious: “The fact that an inflation rate plummets in a historically unique crisis is nothing more than a snapshot.” Left almost unchanged, commented Christoph Kutt, Head of Interest Rate Strategy and Government Bonds at DZ Bank: “The markets have reacted cautiously.” Ralf Umlauf, economist at Landesbank Hessen-Thüringen, said: “The ECB will keep a steady hand.” From a perspective For the banks, however, this is “more of a disappointment”.