On Thursday, September 10, the European Central Bank did not change interest rates, which was in line with the expectations of investors. The ECB also did not change the other parameters of the monetary policy and raised its forecasts both for inflation and for the euro zone's GDP.
The investors also expected that during the press conference Christine Lagarde would mention a too strong euro, which could dim the rebound in the economy and price increases. The head of the ECB only said that her institution would keep a close eye on the euro rates, but the ECB has no objective for the exchange rate and the Bank's task is to maintain price stability.
It seems that this was the mildest form of speech about the euro, which has gained more than 10% to the dollar from the March bottom. However, today, more representatives of the European Central Bank took the floor, which may underline the gravity of the situation. During the Eurofi conference in Berlin, a member of the Governing Council Francois Villeroy de Galhau stressed that exchange rates are important for inflation and monetary policy and the ECB will closely monitor them. Although the Bank has no objective for the exchange rate, it may have consequences for medium-term inflation prospects, and maintaining price stability is an ECB objective.
Villeroy, who is President of the Bank of France, says that inflation remains low, so the ECB will maintain a very accommodating monetary policy as long as necessary. He added that all the options are on the table and if necessary the central bank will be ready to do more.
The ECB's chief economist also spoke up and started a discussion about the euro being too strong when the EUR/USD exchange rate exceeded 1.2000 in late August. The recent appreciation of the euro exchange rate is worsening inflation prospects, Philip Lane wrote in a blog post on the ECB's website. He added that headline inflation is expected to remain consistently low in the medium term, despite gradual growth over the macroeconomic projection horizon.
Such statements may hamper the rise of the EUR/USD exchange rate, which may favour either consolidation or if levels 1.2000 and above were to reappear, another wave of comments about the euro being too strong.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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