How the strong euro is hindering the ECB’s attempts to boost eurozone inflation

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The European Central Bank announced on Thursday a €500 billion ($600 billion) increase of its pandemic-focused asset-buying program to help support the eurozone economy hit by the COVID-19 pandemic’s second wave, but the strengthening of the euro against the dollar complicates its long-elusive goal of boosting inflation.

  • The euro is up 13% against the dollar since its year’s low in March, and is approaching five-year highs level of March 2018.

  • The ECB’s official mission is to maintain inflation in the eurozone “below but close” to the 2% level, but it has consistently undershot the target since 2014. Inflation sank in November to minus 0.3% annually.

  •  The ECB’s own economists forecast prices to rise slowly in the next two years to 1.4% in 2023, still significantly below the central bank’s official target.

  • The higher euro makes imports cheaper, weakening inflation, and makes exported goods more expensive on foreign markets, damping the recovery of the export-dependent eurozone economy.

  • The €500 billion top up on Thursday of the “pandemic emergency purchase programme” will take the total of the COVID-related quantitative-easing effort to €1.85 trillion. The ECB has already acquired €700 billion of securities under the plan since March.

The outlook: Since the strengthening of the euro is mostly due to a weakening of the U.S. dollar since the beginning of the year, there is little the ECB can do to counter the trend — and in any case, it doesn’t target exchange rates per se in its monetary policy decisions.

Meanwhile, it has to support the economy, as fiscal stimulus in the eurozone remains below what would be needed to fully counter the devastating consequences of the COVID-19 pandemic. And its decisive actions since March have helped avoid financial instability, by helping the banks, which were in turn able to keep lending to businesses.

Read: ECB Boosts Bond-Buying Program and Keeps Rate Steady

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