Experts spoke about the impact of the strengthening Euro on the pace of tapering QE

© AP Photo / Michael ProbstСкульптура, symbolizing the Euro, near the building of the European Central Bank. Archival photoExperts spoke about the impact of the strengthening Euro on the pace of tapering QE© AP Photo / Michael Probst

Further strengthening of the single European currency to the U.S. dollar may affect the pace of tapering, the European Central Bank (ECB) purchases of assets (QE), experts say ING.

The ECB introduced a few years ago a number of nonstandard measures of monetary policy. We are talking about the fact that the base interest rate of ECB was reduced to zero, the Deposit rate to negative values (-0.4 per cent). The ECB also buys assets from the market under the quantitative easing program (QE) in the amount of 60 billion euros every month, this program is valid until December 2017, but, as analysts expect, will be extended. The main purpose of the regulator is the increase in inflation in the Euro area and bringing it to the target: just below 2% over the medium term.

«Breakthrough of the Euro/dollar above $ 1.20 dollars per Euro may cause some headache for the ECB,» — said in the report ING.

The forecast of inflation and GDP

Has reached the appreciation of the Euro may affect the ECB forecasts for GDP and inflation in the Eurozone. A new batch of estimates should be presented by 7 September, after the governing Council of the regulator. According to experts ING to cause concern to the ECB can be the fact that the strengthening of the Euro comes too early for the recovery of the Eurozone economy and lift inflation.

«Strengthening the Euro (since previous) June forecast (ECB) could easily cut 0.4 percentage points from the forecast of the ECB for economic growth (the Euro), and about 0.2 with the forecast of inflation», — the document says. However, the ECB can console themselves with the lower yield bonds in the Eurozone that has «partially offset the impact of a stronger currency on growth and inflation».

«We expect the ECB forecasts inflation to 2018-2019 will be reduced 7 September from current levels of 1.3% and 1.6%, respectively. As for monetary policy, the downgrade of its own (ECB) inflation forecast may complicate the issue of reducing (QE – ed.)», — the document says.

However, while the growth rate of the Euro should not cause panic among the ECB, shows the document. But if the strengthening of the single currency continues, it may affect the process of QE tapering.

The prospects for QE

It is worth noting that the ECB cannot simultaneously seek to push inflation to growth and to contain inflation. ING experts believe that if the regulator wants to address the issue of containment of the Euro, the best option would be to make it through the impact on inflation and thereby on monetary policy.

The head of research at ING in Europe, Middle East and Africa Chris Turner said RIA Novosti that the main scenario for ING remains the following: the ECB in October may announce the reduction from January 2018, the volume of monthly purchases of bonds as part of QE doubled to 30 billion euros.

«If the Euro will remain roughly at current levels, the ECB may go for reduction in the amount of 30 billion euros,» he said.

If, at the time of the October ECB meeting (October 26) the strengthening of the single currency will continue and the pair will exceed $ 1.25 per Euro, it can lead to a more modest pace of reduction of QE. It is possible that with this scenario, the ECB will reduce monthly purchases by only 10 billion euros to 50 billion euros next year, says Turner.