Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

ECB to take aim at strong euro with hints of more stimulus

Economy Sep 10, 2020 03:16AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
2/2 © Reuters. ECB headquarters in Frankfurt 2/2
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio

By Balazs Koranyi

FRANKFURT (Reuters) - The European Central Bank is all but certain to keep policy unchanged on Thursday but with the economic recovery losing momentum and a strong euro dampening already-anaemic inflation expectations, it may set the stage for more stimulus later.

Having pulled out the stops this spring to halt a historic economic decline across the 19-country currency bloc, the ECB has time to let governments implement their own countermeasures and for its own ultra-easy policy to seep into the real economy.

But hurdles to the rebound from a 12% output drop in the second quarter are proving bigger than expected, and economists say the ECB will eventually be forced into taking more action, possibly as soon as December.

Surveys indicate that a recent resurgence in coronavirus infections is sapping investor and consumer confidence, with many fearing fresh restrictions on ordinary life.

But more importantly for the ECB, inflation has turned negative, raising the risk that longer term price growth expectations also take a hit, leading to a hard-to-reverse downward spiral.

This is crucial for the ECB, which has undershot its nearly 2% inflation target for the past seven years, casting doubt on the credibility of a policy that is radical, yet fails to achieve its objective.

Compounding ECB's problem, the euro has firmed 8% against the dollar since the spring and more than 4% against a basket of currencies weighted by the bloc's foreign trade. In early trade on Thursday, the euro was trading at 1.1830 against the dollar, not far below a psychologically important 1.20 level.


All this leaves ECB President Christine Lagarde with a complicated communications exercise. She cannot target the exchange rate but also cannot just ignore the euro's rapid rise.

"Ms. Lagarde will need to walk a tightrope, probably hinting that the ECB is monitoring the implications of euro appreciation for price stability, and that all tools can be adjusted as needed to meet the inflation mandate," UniCredit said in a note.

"That said, we doubt that her rhetoric will be sufficiently bold to trigger a trend reversal in the euro."

Guiding the currency is always risky, however, and four ECB board members, including Lagarde and chief economist Philip Lane are lined up to speak in the 24 hours after the meeting, suggesting that the ECB is preparing to fine-tune its message if markets react poorly.

"We argue that the ECB lacks effective options to respond to the euro's appreciation," BNP Paribas (OTC:BNPQY) said in a note to clients. "Instead, verbal pushback on the exchange rate is likely to continue, coupled with a more balanced, but overall still cautious tone on the economy."

Compounding this headache is the U.S. Federal Reserve's tweak last month to its own inflation target, suggesting that it will raise rates later than in the past, which could put downward pressure on the dollar.

A stronger euro cuts into the competitiveness of euro zone exporters and dampens inflation through cheaper imports, a headache as inflation is already too low.

The ECB will also update its economic forecasts on Thursday, but board member Isabel Schnabel has already said that the economy is performing in line with the ECB's expectations so only small changes are likely.

Once it is time to turn words into action, the ECB is likely to keep relying on its 1.35 trillion euro Pandemic Emergency Purchase programme to hoover up even more debt to keep euro zone governments' borrowing costs down.

While some policymakers argue that the scheme needs to be wound down once the actual crisis is over, bond issuance is expected to spike next year, meaning any hint that the ECB will step back from the market risks pushing yields higher.

The ECB announces its policy decision at 1145 GMT, which is then followed by Lagarde's news conference at 1230 GMT.

ECB to take aim at strong euro with hints of more stimulus

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email