ECB warns of Bloomberg’s appeasement to falling prices and euro gain

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© Reuters.

(Bloomberg) – European Central Bank officials agreed at their last policy meeting to avoid complacency in their fight against the recession and to counter investor perception that the euro will inevitably strengthen.

The Governing Council meeting from September 9 to 10 showed officials worried that the exchange rate gains had offset part of their monetary stimulus, with a “material impact” on the outlook for consumer prices. Chief economist Philip Lane said inflation expectations were at “very depressed” levels and were in danger of falling further.

“In the prevailing environment of high uncertainty, keeping a firm hand on monetary policy was deemed the most appropriate,” according to the document released Thursday. “At the same time, it was justified to keep a ‘free hand’ in the face of high uncertainty.”

The euro’s rapid rise to the highest level in two years proved to be a major headwind on the eve of the rally and prompted the Governing Council to say it would closely monitor the exchange rate. Since then, the currency has fallen from its highs.

What Bloomberg Economists Say

“We expect the ECB to acknowledge the significantly weaker outlook in October before increasing PEPP asset purchases by an additional € 600 billion in December.”

-Maeva Cousin. Read his ECB REACT

“It has been suggested that it was the pace of the euro’s appreciation, rather than the level of the exchange rate, that could become a concern,” the ECB said. “It was not clear how persistent recent movements in the exchange rate would be, with volatility being high and the potential for moves in either direction.”

Policymakers stressed that they will carefully assess all incoming information, including currency, “to maintain the flexibility needed to take appropriate policy action if and when needed.”

Officials concluded that the economy of the 19 countries had broadly behaved in line with previous expectations – although some argued that President Christine Lagarde should adopt a more optimistic tone when describing the recovery.

The account referred to remarks that the region’s second-quarter slump was “a little less pronounced than feared”, with growth over the next three months “likely to turn out to be higher than expected. “. The extent to which the recovery would continue throughout the year was “less clear”.

Recently, the outlook has become more uncertain. Viral infections have accelerated sharply across much of the euro area, triggering further barriers to public life and travel that will be particularly damaging to service-dependent economies in southern Europe.

The French statistics agency predicts that the country’s economy will likely stagnate in the fourth quarter, while the Bundesbank expects the recovery in Germany to slow.

Lagarde warned earlier this week that coronavirus containment measures posed a clear risk to the outlook and pledged not to remove monetary support until the crisis is over. Most economists predict that the ECB’s € 1.35 trillion ($ 1.6 trillion) emergency bond purchase program will be expanded this year – likely in December when new forecasts are released .

Board member Fabio Panetta argued last month that the risk of providing too much stimuli is less than being “too shy”. Bundesbank President Jens Weidmann retorted on Wednesday that the economy continues to grow “a little faster than expected” and warned against presuming the ECB would act.

(Updates with account comments starting in the fifth paragraph.)

© 2020 Bloomberg L.P.

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