The ECB will do nothing against the strength of the euro

Christine Lagarde, the European Central Bank president, does not see the euro’s recent appreciation as an important problem for inflation. However, she has recognized that in the medium term, it may harm prices. For now, on the recent rally of the euro, Lagarde has assured that the exchange rate is not the bank’s objective. The Governing Council has discussed the euro’s appreciation, but ECB’s mandate is price stability, Legarde declared. She also mentioned that they had addressed the euro because it has negative implications for inflation. 

Recovery with doubts

On the other hand, Lagarde has highlighted that since the June meeting, the eurozone has experienced a strong rebound in economic activity. It is becoming somewhat uncertain in the face of the significant threats posed by COVID-19. The president has also acknowledged that the recovery is beginning to lose momentum due to the loss of strength in the services sector.

Domestic demand in the eurozone has seen a significant recovery since hitting the bottom. However, heightened uncertainty about the economic outlook continues to weigh on consumer spending and business investment. Inflation is also being weighed down by low energy prices and weak pressure on rates in moderate demand.

The latest inflation data has left annual price growth negative. Furthermore, core inflation has fallen sharply to 0.4%. The crisis is making a dent in prices, as expected. What was not so much counted on was the euro’s strength, mainly when, in turbulent periods, the dollar receives a large part of the capital inflows, generating the appreciation of the ‘green ticket’ compared to the European currency.

However, Lagarde wanted to clarify that this monthly inflation data does not describe the real situation of prices in the eurozone. In the medium term, inflation will regain positive territory. Whether it fears deflation, the banker has affirmed that the ECB’s forecasts do not contemplate this scenario, and the risks have been reduced. Besides, the central bank has already resumed the strategic review that includes modifications to inflation measures and price stability.

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