MNI ECB WATCH: Still In Good Place, Euro In Line With Baseline

The European Central Bank as expected held its key deposit interest rate at 2% for a fifth consecutive meeting on Thursday with President Christine Lagarde saying that the impact of recent appreciation of the euro is incorporated in the ECB’s baseline scenario.

The Governing Council was unanimous in holding interest rates, Lagarde said, stressing that despite January’s inflation reading of 1.7% little has changed from the main baseline which sees the rate of price increases stabilising at 2% in the medium term.

“We cannot be hostage to one reading of inflation that is set to vary in the next months.”, she said, reiterating that the euro area inflation and monetary inflation continue to be “in a good place”.

The ECB sees risks to be broadly balanced, with some ticking to the upside and others to the downside, though Lagarde said it saw no reduction in the range of these risks.

Lagarde noted that the euro has appreciated since last March, fluctuating within a range since the summer, and that current levels are in line with historic averages.

In the statement, Lagarde repeated that a stronger euro could bring inflation down further than expected. An increase in volatility and risk aversion in financial markets could also weigh on demand and lower inflation. (See MNI SOURCES: ECB Wary Of Euro Rise, Confidence Dip)

REPO LINES

Lagarde also said that the ECB is looking at its liquidity framework, and particularly at repo lines, with a view to making them more attractive to other central banks outside the euro area and outside Europe.

“This is in the works, and I hope to be able to announce a bit more in a few days,” she said.

Lagarde also welcomed the appointment of Kevin Warsh as incoming Federal Reserve chair. She said that the ECB will send recommendations to a European leaders’ summit focused on competitiveness on Feb 12.