Yesterday the ECB gave an update on its policy stance which as expected was along the lines of the July statement, however, there were a couple of factors that were interesting. The first being the ‘strong rebound in activity, broadly in line with previous expectations’. The service sector looks to have slowed due to a resurgence in covid cases after its initial improvement post lockdown, however, the industrial production side of things is seeing a stronger recovery. This helped push the estimates for this year’s GDP up to -8% from -8.7% in June, with the projections for 2021 and 2022 being pretty much unchanged. ECB President Christine Lagarde did acknowledge that ‘Overall, the balance of risks to the euro area growth outlook is seen to remain on the downside. This assessment largely reflects the still uncertain economic and financial implications of the pandemic’.
The second point of interest was the mention of the currency appreciation in the introductory statement; ‘the Governing Council will carefully assess incoming information, including developments in the exchange rate, with regard to its implications for the medium-term inflation outlook’. At the press conference Lagarde noted ‘Clearly to the extent that the appreciation of the euro puts negative pressure on prices, we have to monitor carefully such a matter, and this was extensively discussed’ adding ‘but as you know we don’t target the exchange rate’.
The acknowledgement that while the ECB is watching the exchange rate, but not using it as part of its monetary policy helped support the recent gains in the euro, which has risen over 11% against the dollar from March’s lows, trading at 1.1860 at time of writing.