FRANKFURT: European Central Bank president Christine Lagarde took a modestly upbeat view on Europe’s recovery from a historic recession yesterday and played down concerns about the euro’s strength, disappointing hopes she would signal more stimulus.
While warning that a second wave of coronavirus infections represented “headwinds”, Lagarde announced a slight upgrade in the bank’s 2020 growth forecast on the back of a strong rebound in activity and signalled higher underlying inflation.
She also a took a benign view on the currency, simply saying the bank would “monitor carefully” exchange rate movements. This was seen by some analysts as the weakest possible expression of concern after the euro rose eight per cent against the dollar this year, weakening both growth and inflation.
“Clearly to the extent that the appreciation of the euro exercises negative pressure on prices, we have to monitor carefully such a matter, and this was extensively discussed in the Governing Council,” Lagarde told a news conference after the ECB left policy unchanged.
Investors had expected tougher language, so the euro actually firmed by half a percent on her comments as the ECB appeared keen to avoid a currency war.
Sources on the ECB’s rate-setting Governing Council said they chose such a formulation because they judged that the currency was broadly in line with economic fundamentals and they feared any hint of a “currency war” with the United States.
While the strong euro is indeed a drag, some argued that the $1.20 level, seen in the past as a key threshold, is now close to the equilibrium exchange rate and should not be seen as trigger level for the ECB, the sources added.
The measured view on the exchange rate and the upgrade to growth also tempered hopes about a further expansion of its 1.35 trillion euro emergency bond buying scheme, which most economists expect to be extended later this year.
“The surprise came from a series of communication changes suggesting that the central bank is not about to ease policy immediately,” Pictet Wealth Management Strategist Frederik Ducrozet said.
But he added: “The reality of weak growth and disinflationary pressures will ultimately force the ECB to increase its Pandemic Emergency Purchase Programme by 500 billion euros in December.”
Asked about a possible change in policy, Lagarde said council members believed that existing measures were both “efficient and effective” and likely to be used in full.