ECB Governing Council Signals Greater Attention to the Euro

April 22, 2021

As expected, the European Central Bank left its interest rate structure, quantitative policy settings, and forward guidance unchanged at today’s review. The deposit rate will stay at negative 0.5%, and there remains a 1.85 trillion euro envelope on the Pandemic Emergency Purchase Program.

The characterization of inflation dismisses the recent acceleration as a development stemming from idiosyncratic and temporary factors as well as the rise in oil prices. Core inflation remains largely subdued and is likely to continuing being so. Demand is slack. Real GDP fell in the final quarter of 2020 and seems likely to have contracted again last quarter. Growth has turned positive again, but their is significant slack that points to sub-target inflation for some time further. The other disinflationary force that has caught officials’ attention is the strengthening euro.

We will also continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook…. Underlying price pressures are expected to increase somewhat this year, owing to short-term supply constraints and the recovery in domestic demand, although they remain subdued overall, in part reflecting low wage pressures, in the context of economic slack, and the appreciation of the euro exchange rate.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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