The ECB is fighting a battle to keep a lid on its own currency against a wall of indifference
Philip Lane, chief economist of the European Central Bank , speaks during the Jackson Hole economic symposium seen on a laptop computer in Tiskilwa, Illinois, U.S., on Thursday, Aug. 27, 2020.Picture: DANIEL ACKER/BLOOMBERG
“Had the changes to monetary policy goals and strategy we made in the new statement been in place several years ago, it is likely that accommodation would have been withdrawn later, and the gains would have been greater,” Fed governor Lael Brainard said in a speech this week. In other words, the US central bank will delay tapping the interest-rate brake for longer in future.
“The euro-dollar rate does matter,” Lane said on Tuesday. “If there are forces moving the euro-dollar rate around, that feeds into our global and European forecasts and that in turn does feed into our monetary policy setting.” The guardian of monetary stability in the euro bloc has very few options left to meet its inflation target, as it already has deeply negative interest rates and a vast quantitative easing programme. The euro area is now technically in actual deflation, after headline consumer prices declined by an annual -0.2% in August. There are several mitigating factors that perhaps exaggerate this dip, but more worrying for policymakers is the substantial drop in core inflation to just 0.4%.
For its part, the Fed is effectively conducting a policy of benign neglect in the currency market, having provided almost limitless access to dollar liquidity for central banks around the world during the pandemic. For the benefit of its own economy, and for much of the developing world, the US central bank is in no rush to reverse that.
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