Fed inaction highlights need for more ECB stimulus

The boost to activity and inflation from the euro’s weakening since last summer will soon begin to fade. The ECB might feel that it can wait for tighter monetary policy in the US to drag the euro lower, providing a renewed stimulus to the euro-zone’s beleaguered economy. We would disagree.

A divergence in monetary policy between the US and euro-zone is already priced into the currency market. And Thursday’s decision by the Fed to leave interest rates on hold showed that it will tread carefully in beginning to “normalise” monetary policy. So without further ECB action, higher interest rates in the US might not be enough to weaken the euro. We think that more QE is needed.