Lagarde Says ECB Keeping Eye on Euro Without Signaling Alarm
(Bloomberg) -- European Central Bank President Christine Lagarde said the surging euro must be monitored for its impact on prices, but she didn’t signal any pressing need to adjust monetary policy. The currency jumped to the highest in more than a week.
Speaking after the ECB kept its pandemic bond-buying program unchanged at 1.35 trillion euros ($1.61 trillion) and the deposit rate at -0.5%, Lagarde said officials will “carefully assess incoming information, including developments in the exchange rate, with regard to its implications for the medium-term inflation outlook.”
Bloomberg earlier reported that the Governing Council agreed to adopt weaker phrasing about the euro’s appreciation than it did during the last bout of gains.
The single currency was up 0.7% at $1.1884 at 5:45 p.m. Frankfurt time. That’s close to the two-year high it reached when it climbed above $1.20 last week.
A stronger currency weakens inflation by cutting the cost of imports, and undermines output by making exports less competitive. In January 2018, after the euro had risen to about $1.24, then-President Mario Draghi said that volatility in the exchange rate “represents a source of uncertainty” that needs to be monitored.
The euro has soared more than 10% against the dollar since March, and inflation has turned negative for the first time in four years.
“Clearly to the extent that the appreciation of the euro puts negative pressure on prices, we have to monitor carefully such a matter, and this was extensively discussed,” Lagarde said, while repeatedly stressing that the ECB doesn’t target a particular exchange rate.
“The ECB today engaged in an interesting, possibly risky, verbal balancing act,” said Carsten Brzeski, chief economist at ING Germany. The central bank “seems to be concerned about the stronger euro but not too concerned just yet. At least not everyone at the Governing Council.”
Lagarde also revealed new projections, showing policy makers now expect the economy to contract by 8% this year -- slightly less bleak than its outlook three months ago -- before rebounding by 5% in 2021. Price growth will accelerate slowly and is still seen averaging only 1.3% in 2022, far below the central bank’s goal of just under 2%.
Some policy makers wanted the president to take a slightly more optimistic view on the economy, according to people familiar with the discussion. Those officials suggested describing the recovery so far as a bit better than anticipated, as opposed to the phrase “broadly in line with previous expectations” that was ultimately adopted.
That’s a hint that any future decision to boost stimulus will likely need to overcome differences of opinion. Bundesbank President Jens Weidmann and Estonian central-bank Governor Madis Muller have both said recently that emergency support must be withdrawn once the crisis has passed.
In a survey before Thursday’s decision, analysts predicted the ECB will increase its emergency bond plan by around 350 billion euros later this year and extend it by six months. The program is currently scheduled to run through June 2021, and Lagarde said it is “very likely” to be used in full. She also said they haven’t discussed an expansion.
Chief Economist Philip Lane has stressed that the ECB is ready to do more if needed, and that fueling inflation should be the next priority once the economy has overcome the immediate shock of the coronavirus pandemic.
Lagarde reiterated that the Governing Council stands ready to adjust all of its instruments to ensure inflation moves toward its target.
“The strength of the recovery remains surrounded by significant uncertainty as it continues to be highly dependent on the future evolution of the pandemic and the success of containment policies,” she said.
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