FRANKFURT: The European Central Bank will monitor the economic impact of a strengthening euro, ECB President Mario Draghi said yesterday, feeding expectations the climbing currency could open the door to an interest rate cut.
Draghi said the exchange rate was near to its long-term average but went further than many analysts had expected. “The appreciation is, in a sense, a sign of return of confidence in the euro,” Draghi told a news conference.
“The exchange rate is not a policy target, but it is important for growth and price stability and we certainly want to see whether the appreciation is sustained and will alter our risk assessment as far as price stability is concerned.”
The euro hit a 15-month peak of $1.3711 on February 1. It traded below that level yesterday and fell to a one-week low against the dollar and sank against the yen after Draghi’s comments.
French President Francois Hollande said the euro zone must develop an exchange rate policy to protect the currency from “irrational movements”. Germany has been cooler to any thoughts of exchange rate action.
By linking the euro’s exchange rate to growth and price stability, Draghi achieved a deft piece of verbal intervention, analysts said.
“This hints that euro strength — if sustained — could eventually trigger a rate cut,” said Nick Kounis at ABN Amro. Carsten Brezeski at ING added: “Draghi successfully tried to talk down the euro exchange rate and opened the door for possible policy action.”
Last month, Draghi unwound earlier expectations of a rate cut by citing a batch of improving economic indicators. But since then the euro has appreciated further. The ECB’s room for manoeuvre is limited, however. Even if it wanted to, the bank’s statutes mean it is ill-equipped to join a currency “race to the bottom”.
Furthermore, the world’s other top central banks are expanding their balance sheets by printing money, or at least not reversing course, while the ECB’s balance sheet is tightening, partly due to banks paying back early cheap money the central bank doled out last year. A by-product of that could be to drive the euro yet higher.
Draghi gave a view on the state of the euro zone economy to the one he gave in January. Economic weakness was “expected to prevail in the early part of 2013” but later in the year, activity should gradually recover.
Reuters
