WHAT’S NEW- Yesterday the ECB decided to leave key rates and its €1.35bn “Pandemic Emergency Purchase Programme” to run at least until mid-2021 unchanged and flexible. Christine Lagarde said that the course of the pandemic will be assessed further – with the ECB still regarding the risk balance tilted to the downside. Quarterly updated Eurozone projections were raised by +0.7% for 2020 GDP to year-on-year -8.0% due to the slightly less dramatic Q2-slump than feared, while only slightly cut for 2021/22 to +5.0% / +3.2%. Inflation forecasts were confirmed for 2020 (0.3%) and 2022 (1.3%) and slightly raised to 1.0% for next year.
OUR TAKE -The outcome was in line with our expectations. Regarding euro appreciation, the ECB is observing price pressure tendencies – with Lagarde adding that exchange rates are not a mandated target, in contrast to price stability. However, future decisions will be impacted by the euro, in particular in case of further strength. According to Morgan Stanley, a 10% euro appreciation decreases eurozone GDP by - 0.7%. Regarding the Fed’s 2% average inflation target announcement, Lagarde said that the "cornerstone" inflation target is key in the ongoing strategic review, interdependent with several workstream topics. She hinted to future communication during this process providing indications about outcomes, but that the final results should be communicated when the strategic review is completed, so are likely only next year.
WHAT’S NEXT - Now summer has drawn to a close ECB officials will express their thoughts more often again, with the next meeting on 29 October and the last one of the year on 10 December. Between these two, “Europe’s little Jackson Hole” Forum on Central Banking on 11/12 November in Sintra (which will focus on “Central banks in a shifting world”) could be – similar to Fed Governor Powell’s Jackson Hole speech – the event Lagarde chooses to divulge strategic news, possibly indicating future inflation target direction.