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March 13, 2014 6:49 pm
Mario Draghi, European Central Bank president, has attempted to counter the strengthening of the euro, saying the central bank’s forward guidance on interest rates is likely to weigh on the single currency.
He added that the currency’s strength was “becoming increasingly relevant in [the ECB’s] assessment of price stability”.
The euro is trading near its highest level against the dollar for more than two years, with the strength of the currency complicating the task of the ECB in countering the threat of deflation. The euro declined against the dollar following Mr Draghi’s comments, falling from $1.3910 to as low as $1.3846 soon after.
The ECB president said in Vienna on Thursday that a fall in real interest rates, triggered by the central bank’s forward guidance, was likely to prompt a depreciation because it would narrow the gap between real interest rates in the eurozone and elsewhere.
“Our forward guidance creates a de facto loosening of [the] policy stance, as real interest rates are set to fall over the projection horizon,” Mr Draghi said in prepared remarks. He added: “At the same time, the real interest rate spread between the euro area and the rest of the world will probably fall, thus putting downward pressure on the exchange rate, everything else being equal.”
Benoît Cœuré, who sits beside Mr Draghi on the ECB’s executive board, signalled earlier on Thursday that the central bank would ease monetary policy if real interest rates remained stuck at their current levels.
The central bank is hoping that its attempt to clean up the bloc’s banking sector, known as the Comprehensive Assessment, will also help lower borrowing costs in the region.
The comments come a week after Mr Draghi used the ECB’s monthly press conference to voice concern over the impact that the euro’s strength has had on inflation in the currency bloc, which at 0.8 per cent is less than half the ECB’s target of less than 2 per cent.
However, traders paid little attention to those remarks, with the euro rising by more than 1 per cent in the week since the ECB’s policy vote last Thursday.
Last week’s decision by the 24-member governing council to leave its main refinancing rate unchanged at 0.25 per cent for the fourth straight month and resist a widely touted move to inject around $175bn of central bank cash met with disappointment from investors.
Traders also viewed the ECB’s president’s tone at the press conference as hawkish. Mr Draghi adopted a more dovish tone on Thursday evening, insisting that “any material risk of inflation expectations becoming unanchored would be countered with additional monetary policy measures”.
Though the ECB president echoed recent remarks in saying that the risk of falling prices was “quite limited”, he acknowledged that the longer inflation stayed low, the higher the probability of such risks emerging.
Mr Cœuré said: “The ECB’s forward guidance should be supportive: the governing council expects interest rates to stay at present or lower levels for an extended period of time, while inflation should rise towards 2 per cent over our projection horizon.” He added: “This implies that real interest rates for borrowers will progressively fall as inflation rises. And we stand ready to act if this scenario does not materialise.”
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