English (India)

The ECB monitors but not target EUR

calendar 14/09/2020 - 19:45 UTC

EURUSD edged up late Monday on hopes of an orderly soft Brexit ahead of a vote on key Brexit legislation in the British Parliament. The lawmakers set to debate and vote on a bill that would break international law by breaching parts of the Brexit agreement, signed in January. Overall, despite less dovish hold last Thursday, EURUSD under stress on lingering Brexit uncertainty and as ECB may not allow EURUSD above 1.20 for long.

In the ECB Q&A session, last Thursday Lagarde said on extensive discussions about the recent strength of EUR- although the ECB does not target any exchange rate directly, the recent appreciation of the common currency has a negative effect on inflation. As the ECB mandate is price stability (inflation) of just below 2%, the ECB is actively monitoring the EUR and if required will ensure that price stability mandate with all the instruments at its disposal; including higher PEPP and more cuts in DRF (negative R/R); i.e. the ECB will intervene actively if EUR strengthens unorderly for the sake of price stability.

Lagarde also pointed out that the ECB has incorporated the strength of EUR in its introductory statement unlike the previous one and this clearly indicates that although the ECB does not target currency (EUR), it’s certainly monitoring the recent appreciation of the same:

Yes, indeed the Governing Council discussed the appreciation of the euro but as you know, we do not target the exchange rate. Our mandate is price stability and clarity to the extent that the appreciation of the euro exercises a negative pressure on prices, we have to monitor carefully such a matter. This was indeed extensively discussed during our Governing Council.

I think I've been quite clear and quite explicit in the introductory statement concerning the role that the appreciation of the euro plays. I will refer you back to page 3, at the top of the page, where we say: at the same time, in the current environment of elevated uncertainty, 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.

As a good observer of our introductory statements; the exchange rate and the appreciation of our currency were not mentioned in previous documents. So that is clearly an indication of the fact that we do not target, but we monitor and we monitor carefully because obviously, the appreciation of our currency has an impact on our inflation. As I said, it's not a policy target for us. I am not going to comment on the level of our currency, but it is clear that the external value of the euro is an important determinant of price setting in the euro area. So we will continue to monitor the development and be very attentive to that.

----As I said, the European Central Bank does not target the exchange rate. Our mandate is price stability and to that end, we have a medium-term inflation aim which we try to pursue using all the monetary policy tools that are available. It is clear that we are currently observing through the analysis that we do, we are observing negative pressure on the price level. That is partly attributable – largely attributable actually – to the appreciation of the euro. While we don't target at any level, and I have not, do not, and will not comment on any level, we are also monitoring carefully the appreciation of our currency in relation to its impact on our inflation medium-term level.

On your other question, let me take this opportunity to remind you that if and when necessary, and warranted by circumstances, and in accordance with our mandate, the Governing Council is determined to use all the policy tools that it has available, and to deploy them and calibrate them as necessary and as appropriate in order to deliver on our mandate.

That applies to all our policy tools, so I did mention the particular impact of PEPP because that is the most recent development that we've had and recalibrated back in June. I did refer to the APP and to the targeted long-term refinancing operations because they were also the latest one. But it doesn't mean to say that I am excluding all the other tools that we have available. Indeed if and when it was needed, we will not hesitate to use the tools as appropriately and as adequately as is needed.

There are circumstances under which Asset Purchase Programmes are more efficient in order to reach our goals. There are circumstances where interest rates are more efficient. We have considered for the last few months that the Asset Purchase Programmes were the right tool in order to reach our goal.


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