MNI REVIEW: ECB Policy On Hold, Monitoring FX Developments

The European Central Bank left monetary policy unchanged Thursday, revealing mildly positive revisions to its macroeconomic projections, but noting that it was 'carefully assessing' the euro's recent appreciation.

Incoming data since July's monetary policy meeting suggested a "strong rebound in activity broadly in line with previous expectations," ECB president Christine Lagarde said, however significant uncertainty remains, with service sector momentum in particular having recently slowed.

Euro area real GDP contracted by 11.8%, quarter on quarter, in the second quarter of 2020, Lagarde said, with further recovery expected. But summer increases in infection rates have created additional headwinds to the short-term outlook, with further sustained recovery still highly dependent on both the evolution of the Covid-19 pandemic and the implementation of successful containment policies.

September's 2020 ECB staff macroeconomic projections for the euro area predict annual real GDP contraction of 8.0% in 2020, to be followed by growth of 5.0% in 2021 and 3.2% in 2022, Lagarde said. The outlook for 2020 improved by 0.7 percentage point, but it was revised downwards by 0.2 percentage point for 2021, and was cut 0.1 for 2022.

September 2020 ECB staff macroeconomic projections predict annual inflation at 0.3% in 2020 (unchanged from June), 1.0% in 2021 (+0.2%) and 1.3% in 2022 (unchanged). Core inflation was revised upwards, from 0.9% to 1.1% by 2022, with the balance of risk remaining on the downside, reflecting still uncertain economic and financial implications of the pandemic, Lagarde said.

Governing Council members discussed the exchange rate "extensively" at the meeting, Lagarde said, and agreed that although it was not a target for monetary policy, it should be monitored as part of the ECB's wider remit. There was little debate over a change in policy, she added, asserting her belief that the ECB's response to the pandemic emergency had proven both efficient and effective.

Lagarde praised the fiscal measures adopted at national and European level, but said there had not been any discussion of an imminent expansion of the ECB's pandemic emergency purchase programme.