By David Barwick – FRANKFURT (EconoStream) – The Governing Council of the European Central Bank took particularly careful note of exchange rate developments at its latest monetary policy meeting, ECB President Christine Lagarde said Thursday.

In her introductory statement at the press conference following the ECB’s decision to leave its policy measures unchanged, Lagarde hinted at the increased significance of recent global currency movements, specifying that the incoming information of interest was ‘including developments in the exchange rate’.

‘Yes, indeed, the Governing Council discussed the appreciation of the euro’, Lagarde confirmed during subsequent questioning, reminding in the next breath that the exchange rate was not an ECB target. Still, the impact on inflation warrants careful monitoring, which is why the issue was ‘extensively discussed’, she said.

Asked during the further course of the press conference whether her apparent lack of concern about the euro’s recent strength was shared by all Council members, Lagarde noted that her mention of the common currency in the introductory statement represented a departure from previous practice.

‘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…’, she said. Current downward price pressures in the euro area are ‘largely attributable, actually, to the appreciation of the euro’, she said.

Refusing to comment on the euro’s current level, Lagarde added that ‘[i]t 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 them.’

Lagarde painted a picture of recent economic developments consistent with the Council’s decision to stand pat and expressed satisfaction with the effect of the ECB’s policy measures to date. ‘We believe that our monetary policy tools, as calibrated, have worked well’, she said.

She made clear, however, that the Council remained willing to act.

‘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’, she said. ‘And that applies to all our policy tools.’

Based on sovereign debt yields and ‘all indicators of fragmentation’ throughout the region, she said, the pandemic emergency purchase programme (PEPP), which has been the centrepiece of the ECB’s response to the crisis, had stabilized financing conditions and warded off fragmentation risks.

‘So, we decided … to maintain our accommodative monetary policy, and certainly, under current circumstances, it is very likely that the full envelope of PEPP will be used for the purpose of developing those policies’, she said.

The total volume of the PEPP is €1.35 trillion, its original €750bn volume when announced on March 18 having been stocked up by €600bn at the Governing Council’s June monetary policy meeting. The Council had not discussed another possible expansion today, she revealed.

Elaborating on the wisdom of deploying the PEPP to the full extent originally planned, Lagarde affirmed that ‘we are pretty much back to the pre-Covid levels in terms of both spreads and dispersion of yields’. While the PEPP’s uniquely flexible character thus ‘has become less prominent’ for the time being, its usefulness as a source of further monetary accommodation ‘has taken a central stage instead’, she said.

At the same time, Lagarde confirmed a diminished threat of deflation. ‘Deflationary risks, which were slightly higher back in June, in our latest projections have receded in September’, she said. ‘… the [Eurozone HICP reading of] -0.2% in August was a bit of a wake-up call for some; we don’t think that it is actually descriptive of a situation that we are interested in, which is the medium-term evolution of inflation. And those deflationary risks … have actually receded.’

Lagarde’s introductory statement noted ‘a strong rebound in activity broadly in line with previous expectations’, while characterising the recovery as ‘surrounded by significant uncertainty’ related to the pandemic’s evolution.

As had become evident would be the case, staff macroeconomic growth projections updated today changed only slightly, with the ECB now calling for annual real GDP growth of ‑8.0% in 2020 (versus -8.7% in June), 5.0% in 2021 (5.2%) and 3.2% in 2022 (3.3%).

‘Overall, the balance of risks to the euro area growth outlook is seen to remain on the downside’, Lagarde said. ‘This assessment largely reflects the still uncertain economic and financial implications of the pandemic.’

Inflation projections underwent even less change, with ECB staff envisioning annual HICP at 0.3% in 2020 (unchanged versus June), 1.0% in 2021 (0.8%) and 1.3% in 2022 (unchanged).