Euro not yet an issue for the ECB

It noted that its ‘updated assessment reconfirms that inflation should stabilise at (the) two per cent target in the medium term’. As such, it looks likely that interest rates will remain on hold in the coming months. Though as always, the ECB is ready to move if the outlook changes (it is at a good place but not a fixed place). It re-iterated that it will ‘follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance’ and that it is not ‘pre-committing to a particular rate path’. Indeed, the ECB noted that ‘the outlook for inflation continues to be more uncertain than usual on account of the volatile global policy environment’ and of course last month’s events would only have underlined that.

Meanwhile, it does not look like the euro’s recent strengthening against the dollar is causing any shift in the ECB’s view on the policy outlook. The ECB did note that ‘a stronger euro could bring inflation down beyond current expectations’, but that was also in the December statement. More generally, ECB President Lagarde seemed to play down how strong the euro was currently. She noted that ‘the current range within which the euro relative to the dollar is evolving is very much in line with the overall average of that exchange rate between the euro and the dollar for as long as the euro has been around’.

As we set out in our note last week (see here), the euro move so far is not close to being big enough to trigger an ECB rate cut as a response. This partly reflects that the move in the exchange rate is clearly dollar-driven, so the euro has moved very modestly against a basket of currencies. Indeed, it is the trade-weighted euro moves that matter for growth and inflation. Our base case continues to see the ECB keeping its deposit rate on hold at 2% over our forecast horizon.