Report
Patrick Artus

Is it true that the euro zone cannot end its low-interest rate policy because of the risk of euro appreciation?

It is often claimed that the ECB will not be able to end its zero or negative interest rate policy due to the risk of euro appreciation, or at least that the ECB will not be able to raise interest rates until the Federal Reserve has done so. Is this argument correct? The first question to be asked is whether or not the yield spread between the United States and the euro zone has an impact on the dollar / euro exchange rate; The second question is whether an appreciation of the euro would be negative for the euro zone. Admittedly, an appreciation of the euro is bad for euro-zone industry, but it reduces inflation and therefore boosts real income. We see that: The yield spread between the dollar and the euro has had an impact on the dollar/ euro exchange rate since 2010, but not before; An appreciation of the euro does not seem to be negative for growth in the euro zone. All things considered, the argument that the ECB's inaction is explained by the exchange rate is only partially correct.
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

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