The chief economist of the European Central Bank has warned there is “no room for complacency” on the eurozone’s economic rebound from the coronavirus pandemic, as the rising euro drags on inflation.
“Inflation remains far below the aim and there has been only partial progress in combating the negative impact of the pandemic on projected inflation dynamics,” Philip Lane said in a blog published on Friday. “The recent appreciation of the euro exchange rate dampens the inflation outlook.”
His remarks dialled back the more upbeat tone struck a day earlier by ECB president Christine Lagarde, who some analysts said had sounded too optimistic.
The euro has risen 10 per cent against the US dollar since March. While this partly reflects a more positive outlook for the eurozone, economists say it could also drag inflation down by lowering import prices and reducing the competitiveness of the bloc’s exports.
Data published last week showed that the eurozone has slid into deflation for the first time in four years; headline consumer price inflation was minus 0.2 per cent in August, down from an increase of 0.4 per cent the previous month.
On Thursday, Ms Lagarde upgraded the ECB’s gross domestic product and inflation forecasts and said the central bank had not discussed expanding its bond-buying scheme, but it was monitoring the euro. This helped to push the euro above $1.19 against the dollar, before it retrenched.
Mr Lane’s blog was interpreted by analysts as an attempt to adjust the serene impression given by Ms Lagarde’s comments on Thursday.
Mr Lane “sounds much more alarmist than [Ms] Lagarde did yesterday”, said Carsten Brzeski, economist at ING.
He compared Mr Lane’s latest blog with a post he published in March in an attempt to clarify Ms Lagarde’s comment that it was not the ECB’s role to “close the spread” between Italian and German bond yields, which triggered a sell-off in bond markets.
“It is indeed another attempt to correct the message from a governing council meeting already less than 24 hours later,” Mr Brzeski said.
Later on Friday, Ms Lagarde echoed Mr Lane’s message, saying: “Our accommodative monetary policy needs the support of fiscal policy, and none of us can afford complacency in the present time.”
Other senior ECB policymakers who spoke publicly on Friday also highlighted the impact of the rising euro. François Villeroy de Galhau, governor of the Banque de France and ECB council member, said in a speech: “We don’t target exchange rates. But obviously the exchange rate does matter for inflation and monetary policy.”
However, Vitas Vasiliauskas, head of the Lithuanian central bank, played down the importance of the rising euro, saying: “We should watch it, but historically it’s not that exceptional.”
Policymakers’ efforts to highlight the consequences of the rising euro suggested rising discord in the ECB governing council over whether more monetary stimulus would be required, Mr Brzeski said: “This pretty much looks like a split in the governing council.”
Lena Komileva, chief economist at G+ Economics, said: “The many voices of the governing council today send a signal that policymakers are still searching for the common ground on how to respond to the exchange rate.”
Mr Lane indicated the ECB would decide later this year whether more stimulus was needed once there was more clarity on the strength of the economic recovery, the direction of the euro, the spending plans of governments and the fate of Brexit talks.
“Over the coming months, a richer information set will become available that will help to inform the calibration of monetary policy,” the ECB chief economist wrote.
Frederik Ducrozet, strategist at Pictet Wealth Management, said: “The problem with [Mr] Lane’s clarification is that it suggests he may have failed to impose his views upon the governing council . . . challenging the view that the monetary stance will be adjusted again in December.”
Most economists expect the ECB to expand its €1.35tn emergency bond-buying programme as early as December if inflation shows little sign of bouncing back. Mr Ducrozet said this was “still my baseline, but upcoming data will be more important than before”.