ECB’s Lane Toughens Euro Message With Warning on Inflation
(Bloomberg) -- European Central Bank chief economist Philip Lane warned that the euro’s appreciation this year has dampened the inflation outlook, using tougher language than President Christine Lagarde and signaling that more monetary stimulus might be needed.
Inflation will remain negative for the rest of the year and upward revisions in core price growth because of the economic rebound have been “significantly muted” by the stronger exchange rate, he wrote in a blog post on Friday.
“It should be abundantly clear that there is no room for complacency,” he wrote. “The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves toward its aim in a sustained manner.”
His remarks come a day after Lagarde said only that the exchange rate must be monitored for its impact on inflation, prompting economists and investors to question whether the ECB didn’t see the gains as alarming.
The ECB repeatedly says it doesn’t target the exchange rate, but a stronger currency weighs on prices by cutting import costs. It also undermines output by making exports less competitive.
Bank of France Governor Francois Villeroy de Galhau said in a speech shortly after Lane that the exchange rate “does matter for inflation and monetary policy” and will be monitored.
The single currency has jumped more than 10% since March and climbed above $1.20 last week for the first time in two years. It was at $1.1868 at 11:42 a.m. on Friday, up 0.5% on the day.
Lane’s concern about the currency don’t appear to be shared by all members of the Governing Council though. They agreed on Thursday that there was no reason to overreact, according to people familiar with the matter.
Governing Council member Vitas Vasiliauskas said on Friday that appreciation isn’t especially significant. “We should watch it, but historically it’s not that exceptional,” he told reporters in Vilnius.
Policy makers need to walk a fine line in trying to stress they are not targeting the exchange rate, which could bring accusations that they’re inciting a currency war.
The ECB left its pandemic bond-buying plan unchanged at 1.35 trillion euros ($1.6 trillion) on Thursday. Economists surveyed before that policy meeting predicted that the program will be increased by about 350 billion euros before the end of the year.
“If the euro is going to accelerate faster, then the arguments in favor of boosting stimulus will get even stronger,” said Joerg Kraemer, chief economist at Commerzbank AG, who predicts the purchase program will be boosted around the turn of the year.
Euro area bonds rose after Lane’s blog, sending the yields on German and Italian 10-year debt lower by three basis points to minus 0.46% and 0.98% respectively. Money market bets indicate there’s a 50% probability that the ECB will lower the deposit rate 10 basis points in April.
Lane signaled that the jury is still out on the ECB’s next steps, noting the elevated uncertainty and downside risks to the economic recovery.
“Inflation remains far below the aim and there has been only partial progress in combating the negative impact” of the pandemic, he wrote. “Over the coming months, a richer information set will become available that will help to inform the calibration of monetary policy.”
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