MNI ECB WATCH: ECB Set To Hold, As Inflation Close To Target

The European Central Bank is set to hold its key deposit rate at 2% on Thursday for a fifth consecutive meeting, with monetary policy still in a “comfortable place,” though policymakers will assess threats to investor confidence and to the export outlook in the wake of last month’s bout of dollar weakness. (MNI ECB SOURCES: ECB Wary Of Euro Rise).

While the euro has come off its highs above USD1.20 since the naming of Kevin Warsh as the incoming chair of the Federal Reserve, Governing Council members will be briefed on the effects of a stronger currency by Chief Economist Philip Lane in his regular presentation.

The hit from a higher euro to already-strained competitiveness, as European firms face what officials have dubbed a second “China shock,” will add to doubts over future growth at a time when U.S. threats around Greenland are likely to have impacted confidence just as the uncertainty of last year had seemed to be receding.

Some Governing Council members are keen on reinforcing the meeting-by-meeting nature of current ECB policy, and could suggest changes to the statement, such as to explicitly underline the symmetric nature of the current inflation target, and to rule out any de facto return to the previous “below but close to 2%” formulation.

Policymakers will assess whether the euro’s appreciation reflects a temporary adjustment or a more persistent trend, focusing in particular on its implications for inflation, which is already expected to be close to the 2% target over the comping years.

Whether in the statement or in the subsequent press conference, the ECB is expected to stress that it does not target any particular level for the euro, while acknowledging the disinflationary impulse and risks associated with a stronger currency

ECB President Christine Lagarde is unlikely to echo comments made by Vice-President Luis de Guindos in July, when he said that an exchange rate over USD1.20 would be “complicated,” a remark which some officials consider gave the market a target to aim for.