ECB: Recovery Uncertain; Monitoring Euro Strength

The eurozone economy faces an uncertain future, despite evidence of a robust third quarter rebound, according to the eurozone’s top central banker.

“While incoming data suggest that we will see a strong rebound during the third quarter, the strength of the recovery remains very uncertain,” said European Central Bank President Christine Lagarde, according to the text of her introductory remarks to a Franco-German parliamentary assembly Monday. The language was similar to that used following the ECB’s rate-setting meeting earlier this month.

Lagarde hinted at the governing council’s concern over the rapid appreciation of the single currency, noting that ECB is assessing “developments in the euro exchange rate, with regard to its implications for the medium-term inflation outlook”.  The euro has appreciated by more than 5% against the dollar since the start of the year, which could further complicate the bank’s challenge in meeting its inflation target of close to but below an annual rate of 2.0%. Inflation has moved into negative territory, slipping by 0.2% in August.

The ECB president touted the Bank’s pandemic emergency purchase programme (PEPP) in easing monetary policy and stabilising financial markets. However, the text of her address did not mention any review of the bank’s asset purchase programme, launched late last year.

Earlier on Monday, the Financial Times reported that the Bank has launched a sweeping review of the APP, citing two unnamed governing council members. According to the rate setters, the ECB will consider whether the flexibility built into the PEPP should be transferred to the APP.

APP purchases are conducted in line with the ECB’s capital key, which allocates bond buying in proportion to the size of an individual eurozone economy. The PEPP has worked outside of those restrictions, allowing large purchases of securities from southern EU nations, which have been hit much harder by the pandemic.

Laurie Laird


Julie Ros
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Julie Ros

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