ECB to contend with risks of unwarranted tightening stance

Last week, board member Cœuré described the 4% appreciation since the summer as "fairly significant", showing the sensitivity to the euro in a context of low inflation and dovish central banks. For now, the risks of higher US interest rates may have declined due to Fed inaction, although the risk of volatility remains, states Societe Generale. 

In addition to the macroeconomic risks stemming from external demand and China, the ECB has to contend with the risks of an unwarranted tightening of the monetary policy stance, be it via a stronger currency or a possible spillover of higher interest rates in the US or due to market volatility. On the currency, the ECB's Governing Council is likely to be relieved by the signs of euro weakening since the Fed meeting. 

The ECB has few tools to deal with an unwarranted tightening in policy, and a further reduction in the deposit rate is expected and, possibly, expanding asset purchases to include foreign assets as possible instruments, in addition to more asset purchases, added Societe Generale.