The European Central Bank is carefully watching implications of a strong euro, ECB President Christine Lagarde said today.

The ECB chief confirmed that the bank expected to use its stimulus package in full to help pull the region out of recession. 

Ms Lagarde warned that signs of a second wave of new coronavirus infections across Europe represented "headwinds" to the economy and that risks were skewed to the downside.

But she also announced a slight upgrade in the ECB's 2020 growth forecast, buoyed notably by improved consumer demand. 

The bank, grappling with inflation that turned negative last month for the first time since May 2016, maintained its forecast for 0.3% inflation for the year as a whole.

But it said that more months of negative price movements were yet to come. 

"Clearly to the extent that the appreciation of the euro exercises negative pressure on prices, we have to monitor carefully such a matter, and this was extensively discussed in the Governing Council," Ms Lagarde said. 

The euro has risen to around $1.20 due to various factors.

These included in reaction to the more discretionary inflation-targeting stance the US Federal Reserve announced last month, and after an EU-wide pandemic recovery fund was agreed. 

Ms Lagarde stressed however that she would not comment on the level of the euro, and noted that the risk of outright deflation was not included in the ECB's existing forecasts. 

Attempting to guide the currency is risky, and four ECB board members, including Lagarde and chief economist Philip Lane are lined up to speak in the next 24 hours, suggesting the ECB is preparing to fine-tune its message if markets react poorly.  

The euro gained to a one-week high of $1.1888 after Lagarde said incoming information on the economy pointed to a strong rebound in growth in the third quarter. 

ECB policymakers had earlier left policy unchanged, but with the economic recovery losing momentum there is an expectation that the bank will at some point provide more stimulus to counter the record 12% output drop seen in the second quarter. 

Asked about a possible change in policy, Lagarde said that council members believed that existing measures were both "efficient and effective" and likely to be used in full.

ECB chief Christine Lagarde

"Under current circumstances it is certainly very likely that the full envelope of PEPP will be used," she said of the €1.35 trillion Pandemic Emergency Purchase programme. She added later that no change to PEPP had been discussed. 

With today's decision, the ECB's benchmark deposit rate remains at -0.5% while the main rate remains at 0%. 

Meanwhile, the ECB said it expects the euro zone to suffer a smaller recession this year than earlier feared but inflation is still likely to undershoot its target for years to come, its updated economic projections showed today.  

In what it describes as the baseline scenario, the ECB expects GDP to shrink by 8% this year, an improvement on the 8.7% contraction it expected in June, the ECB President said. 

But the recovery is also likely to be slower, with 2021 growth now seen at 5%, slightly below the 5.2% projected three months earlier. 

The balance of risk to the economy remains skewed to the downside following the coronavirus pandemic, Lagarde said. 

The ECB left its inflation projections almost unchanged, with an increase of 0.3% seen this year, rising to 1.0% in 2021 - slightly more than it foresaw in June - and 1.3% in 2022.