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ECB Monthly Report Ignores Currency Risk

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The European Central Bank (ECB) has published it’s Monthly Report. This is a very detailed report addressing the state of the Eurozone economy with particular reference to price stability.

Last week ECB Chair, Mario Draghi, stressed that the risks for the European economy remain concentrated on the ‘downside’. There is no question that this early recovery phase for Europe, as well as for most developed economies, is at a very fragile stage.

Yesterday’s Industrial Production figures hinted at signs of inflation picking up in the Eurozone. Today’s ECB Monthly Bulletin re-iterates the Bank’s view that “inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with the Governing Council’s aim of maintaining inflation rates below, but close to, 2%”. In reality the actual projections are slightly lower than those previously stated by the ECB who are now claiming “annual HICP inflation at 1.0% in 2014, 1.3% in 2015 and 1.5% in 2016. In the last quarter of 2016, annual HICP inflation is projected to be 1.7%”.

The ECB report slightly upgrades Eurozone GDP growth forecasts and now predicts “annual real GDP increasing by 1.2% in 2014, 1.5% in 2015 and 1.8% in 2016”.

The ECB has taken the opportunity to re-confirm it’s commitment to loose monetary policy, the Monthly Bulletin states that “the information and analysis now available fully confirm the Governing Council’s decision to maintain an accommodative monetary policy stance for as long as necessary”

Surprisingly, there is no mention of the recent strengthening of the Euro. The Report in fact clearly mentions that “Economic activity is also expected to benefit from a gradual strengthening of demand for euro area exports”. This would suggest that the ECB sees no threat from a rising currency and is therefore not likely to take steps to weaken a Euro that is set for an imminent test of the key $1.40 level.

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