The European Central Bank (ECB) has had some success in boosting economic growth and job creation in the Euro Zone, but at the same time its aggressive quantitative easing program has not succeeded in raising inflation to a more desired level. 

In fact, a recent report the ECB had to once again reduce its inflation outlook for the Zone and this time the ECB blamed the strong euro.

Inflation in the Euro Zone is now projected to decelerate to 1.2% in 2018, four-tenths of a percentage point lower than a previous set of projections in March.

The ECB anchors its latest inflation forecast on the assumption that the euro-U.S. dollar exchange rate will stabilize at 1.18.

But as a National Bank of Canada report by Krishen Rangasamy indicates, the projected reduction in the inflation could have been even more severe since the ECB’s own research suggests the euro’s appreciation since March would reduce the following year’s annual inflation rate by a full percentage point.

So, the improving Euro Area economy managed to limit the inflation downgrade somewhat.

But if the euro stays near current level of 1.20 U.S., or even appreciates further, another inflation downgrade may follow, particularly if the Zone’s economic growth rate softens after a strong 2017. 

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