The ECB left its policy unchanged, though analysts expect the ECB to gradually withdraw its monetary stimulus when inflation objectives are reached. Do you share their point of view or not? Why?
© David Kohl
To my mind, it is reasonable to believe that the ECB will proceed with the withdrawal from the loose monetary policy. Nevertheless, the ECB has its inflation mandate, while short-term inflation fluctuations such as oil prices are probably transitory, and it will, perhaps, take some time until underlying inflation is actually moving upwards in the Euro zone. Therefore, I assume that the ECB policymakers are right to wait.
The economic recovery in the Euro zone has sped up recently, though experts suggest that the current pickup is set to be temporary. In your opinion, what factors will affect further economic growth?
In my opinion, the factors that might affect economic performance of the Euro zone could be domestic demand, more specifically, pent-up demand, and the gradual improvement of the labour market. In recent months, we have not seen people in Spain, Italy and other European countries consuming at the same pace as before, creating a sort of under-consumption on the back of the high unemployment rate. Now that the labour market slowly improves in these countries, private consumption is getting back into shape; therefore, domestic demand should make the economic recovery more lasting than pessimists assume.
What will be the major drivers for the Euro through the next quarter?
The major driver for the next quarter should be speculation that the European Central Bank is prepared to reduce a bit its burden from the negative deposit rate policy, which is a part of the unconventional policy package. The ECB policymakers signalled some appetite to reduce this burden due to the fact that it is not particularly helpful for the recovery, saying that eventually it might even have a negative effect. Furthermore, as the money market rate is very close to the profit rate, much closer to the deposit rate and to the main refinancing rate, the interest rate range might not widen as much as people feared at the beginning of the year. Thus, there is lingering support for the Euro or at least a good chance that the shared currency will not weaken from here but might instead have a potential to appreciate a little bit against the US Dollar.
What are your forecasts for EUR/USD for the same period?
Our forecast for the EUR/USD currency pair stands at 1.06 by the end of the Q2 of 2017.