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ECB Monetary Policy Meeting Accounts: A further appreciation of exchange rate could have adverse implications for inflation outlook

The ECB released account of its April 21-22 monetary policy meeting. It noted that:

  • Incoming information, including high-frequency indicators, indicated that economic activity was likely to have contracted again in Q1, but pointed to resumption of growth in Q2
  • Progress with vaccination campaigns and envisaged gradual relaxation of containment measures underpinned expectation of  firm rebound in economic activity, especially in H2 of 2021
  • Risks to Eurozone's growth outlook continued to be on downside in near term, but remained more balanced over medium term
  • Underlying price pressures were subdued in context of weak demand and significant slack in labour and product markets, but were expected to increase somewhat in 2021
  • Inflation would exhibit some volatility for the remainder of the year
  • As regards external communication, two aspects were important: 1) Governing Council needed to reaffirm its current practice of conducting comprehensive joint evaluation of prevailing state of financing conditions against inflation outlook at monetary policy meetings in which policy deliberations were informed by new round of staff projections (new comprehensive joint assessment should be conducted at ECB's next monetary policy meeting in June); 2) it was important to highlight that calibrating purchases under PEPP so as to counter adverse effects of the pandemic on medium-term inflation outlook was only one element in achieving aim of stabilising medium-term inflation around levels below, but close to, 2%. Ample monetary policy support remained crucial beyond pandemic period in order to support inflation and return it to inflation aim. Governing Council, therefore, needed to continue to stand ready to adjust all of its instruments, as necessary, to fulfil its mandate
  • With respect to latest exchange rate developments, it was noted that euro had appreciated slightly since Governing Council’s last meeting. It was underlined that a further appreciation of the exchange rate could have adverse implications for inflation outlook
  • It was also stressed that outlook for both growth and inflation remained dependent on support of fiscal policy measures and very accommodative monetary policy stance
  • Members generally expected stronger recovery to take place in H2 of 2021 but emphasised that uncertainty surrounding near-term growth outlook remained high
  • With regard to recent developments in inflation expectations, members noted that longer-term inflation expectations reported in ECB Survey of Professional Forecasters were unchanged, at 1.7%, while market-based indicators of inflation expectations had increased, although this increase mainly reflected increase in risk premia
  • Members expressed broad agreement with proposal made by Mr. Lane to leave ECB’s monetary policy configuration unchanged and to reconfirm the very accommodative stance
  • It was also widely agreed that it should be highlighted that future pace of purchases under PEPP was data-dependent and would continue to be based on joint assessment of financing conditions and inflation outlook
  • Governing Council’s decision in March to undertake significantly higher PEPP purchases than during first few months of the year remained appropriate

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