ECB – Easier over 2 legs

15th March 2016

For the ECB, it is easier to get there

with the use of two legs

A guest article by Tor Vollaløkken from EURUSD Insider

Leading up to last week’s ECB monetary policy meeting we argued that for the ECB to get inflation closer to the objective, the ECB would need to see EURUSD below 0.95. We just used the simple assumption that lowering the exchange rate by 15%, the impact on headline consumer prices would be 0.6%.

We have further estimated the trade balance surplus of the Euro area would widen by 50 billion – adding 0.25% to Euro area GDP – should the exchange rate stay around 0.95 throughout a year. What we also have argued is the difficulties the ECB face getting the exchange rate down to that level with the support for the currency balance of payment components provide – and more so the lower the currency should go.


The ECB might have come to the conclusion that lowering interest rates and printing a lot of the currency might well prevent the currency from appreciating in value – but getting it below the level it had at the start of their QE program, might not be so easy. By lowering the marginal lending rate as well as introducing a TLTRO2, the ECB to some extent recognise that they need to do more than to attack the currency leg and that real inflation you get from demand for goods and services picking up.

This second leg of providing a lot of liquidity was already in place through the asset purchase program and earlier lending programs for banks but though the additional measures put in place last Thursday, they have strengthened this leg further. The idea is that the two legs combined will both give a lower euro and more of cheap lending to the real economy.


The Fed has been doing what the ECB now is doing – a bit differently but basically the same – for 6 years. The lesson from the US is a bit along the following lines: Despite having printed trillions of US dollars and kept short-term interest rates effectively to zero per cent for years, inflation has been moderate in the US. Millions of Americans have been employed over the last three years but despite so, there has been no upward pressure on salaries and earnings and therefore spending has also been restricted. For an economy where domestic demand is such a big part of the overall economy, consumers’ behaviour has prevented prices from rising.

Euro 3029a

While falling energy prices have added to disinflation, the real reason we are classifying today’s inflation scenario as a problem is that there is a lack of overall demand in the economy, predominantly caused by people not spending. Spending habits in the US might pick up from now and onwards as the labour market is tight and therefore likely will give a boost to salaries and earnings. But that is happening six years after measures were put in place intended for them to do so.

The ECB might also be in for a long fight against low inflation. Long because of the time it takes for consumers to start spending again but not so long as in the US for reasons of the earlier and more significant impact a low euro has on Euro area economy. This is one of the points where the two economies differ: A strong or weak euro has much more of an influence on the Euro area economy than what is the case for the US economy from the value of the USD

Tor2Tor Vollaløkken from EURUSD Insider

For the first 17 years of his professional life he was employed by a leading European bank, including several years as Head of Foreign Exchange. For the last 20 years he has been an individual FX trader, trading EURUSD full-time since 1999.

Tor Vollaløkken has trained FX traders all his professional life and conducted numerous presentations and seminars on currency trading topics for banks, clients of banks and individual FX traders. He writes frequently about how economics influence currencies and currencies influence economies. 

Tor Vollaløkken is the Publisher and Editor of The EURUSD Insider and the Author of trading manuals and numerous articles about economics and currencies.

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