Draghi Signals Euro Strength May Hurt ECB’s Recovery Efforts

7 Feb

European Central Bank President Mario Draghi signaled policy makers are concerned that the euro’s strength will hamper their efforts to pull the economy out of recession.

“The exchange rate is not a policy target, but it is important for growth and price stability,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark rate at a record low of 0.75 percent. “We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.” The comments pushed the currency down more than a cent against the dollar.

While latest data show the 17-nation euro economy is starting to stabilize after the sovereign debt crisis drove it into recession last year, the euro’s gains could stymie a recovery before it has begun by curbing exports and pushing inflation too low. Draghi noted that the ECB will publish new economic projections next month and stressed that officials will “maintain our accommodative monetary stance.”

“This was a verbal intervention,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “Draghi reinforced multiple times that the ECB will keep up its accommodative policy stance and he indirectly suggested that the ECB may revise its inflation projections downward next month.”

Euro Drops

Mario MontiThe euro fell as Draghi spoke, dropping to $1.3393 at 4:43 p.m. in Frankfurt. It reached a 14-month high of $1.3711 this month and a three-year high against the yen.

“The market is reading the comments as generally downbeat,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London. “That and the comments about the risks to inflation have pushed the euro down.”

The ECB, which aims to keep inflation just below 2 percent, currently forecasts the rate of annual consumer-price gains will drop to 1.4 percent next year from 1.6 percent this year. A stronger euro damps prices on imported goods.

Draghi said economic weakness will prevail only “in the early part” of this year and “later in 2013, economic activity should gradually recover, supported by our accommodative policy stance.” Still, risks to the economic outlook remain on the downside, he said.

Rate Outlook

“Draghi subtly talked down expectations of higher interest rates and the euro,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. Indeed, “euro strength, if sustained, could eventually trigger a rate cut,” he said.

Source: bloomberg.com

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