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Mario Draghi put further cuts in European Central Bank interest rates back on the agenda on Thursday.
The ECB president did not say as much. But his comments were littered with hints of concern about the euro’s strength. Currency appreciation posed a “downside risk” to inflation – meaning the ECB could undershoot its 2 per cent target. At Thursday’s governing council there had been “hints and discussions” about how to improve financial conditions.
His remarks duly sent the euro lower. However, it might take more than talk to change the momentum behind its rise. No ECB action is imminent. Mr Draghi stressed at least 10 times that the central bank’s monetary policy was already “accommodative”. But the euro has risen almost 9 per cent on a trade-weighted basis since late July and 34 per cent against the yen. Eurozone politicians are squealing (except in Germany).
Mr Draghi’s problem is that the euro is rising on improving confidence in the eurozone’s stability, and aggressive action elsewhere, for instance Japan.
While eurozone share prices have fallen back in the past week or so, economic sentiment indices have picked up – and banks are paying back the more than €1tn in cheap three-year liquidity lent by the ECB a year ago. Thursday’s ECB-approved deal to sort out Ireland’s banks was another sign of eurozone wounds healing – but pre-election politics in Italy and a political scandal in Spain are having the opposite effect.
As well as the euro’s performance, the ECB will watch two things. First, whether its rise throws off course the tentative economic recovery. Second, moves in short-term money-market interest rates. A serious jump upwards could persuade the ECB to push into negative territory the rate charged on its deposit facility, which acts as a floor. In January Mr Draghi had said interest rate cuts were not even mentioned. With hindsight, he may have decided that was a mistake.
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