I said that CBs, like the ECB, can still wait some time before year-end to take new decisions and assess data developments. The recessionary shock and the decrease in oil prices weakened inflation, and monetary policy cannot overcome that in the short-term./1
The recovery is continuing, w/ the latest composite PMI at 52, indicating expansion. Fiscal policy is now more effective than Mon.Pol. to help growth. The ECB has an expansionary policy w/ negative rates & still increasing balance-sheet whereas the FEB stopped temporarily /2
The FED decided on a new regime of averaging inflation-targeting(AIT) that other major CBs are likely to follow. However, the FED has not yet acted on it. AIT commits the CB to take measures to increase inflation above target after years of being below. Will the FED move now? /3
The case for a policy move to contain the exchange rate appreciation is overdone. Monitoring the exchange rate is necessary, but the level around 1.18 to USD will not hamper the recovery. The IMF considers the euro in effective terms slightly undervalued imf.org/en/Publication…
Additionally, the CA is in surplus, and the exchange rate pass-through (ERPT) is quite weak: “..the ERPT to import prices in the euro area has been weak during the very recent period and close to zero to consumer prices (ECB 2017 w.p. No 2003)” ecb.europa.eu/pub/pdf/scpwps… /5
There are many reasons for the exchange rate lower effectiveness: price to market for competition purposes, supply-chain enlarged role, increasing invoicing in euro, shifts in sectoral export composition (see VC macroviews.net/wp/2018/10/25/… p. 16) 6/6
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