Draghi’s Patience Snaps on Euro as ECB Threatens Response

Photographer: Andrew Harrer/Bloomberg

Mario Draghi, president of the European Central Bank, speaks during a news conference at the International Monetary Fund and World Bank Group Spring Meetings in Washington, D.C., on April 12, 2014. Close

Mario Draghi, president of the European Central Bank, speaks during a news conference... Read More

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Photographer: Andrew Harrer/Bloomberg

Mario Draghi, president of the European Central Bank, speaks during a news conference at the International Monetary Fund and World Bank Group Spring Meetings in Washington, D.C., on April 12, 2014.

Mario Draghi’s patience with the euro has snapped.

“The strengthening of the exchange rate requires further monetary stimulus,” European Central Bank President Draghi told reporters in Washington on April 12. “That’s an important dimension for our price stability.”

The warning, which prompted the biggest drop in the single currency in three weeks, marked the strongest stance yet taken by Draghi since he and fellow policy makers began complaining in early March about the euro’s rise. With inflation at about a quarter of the ECB’s goal, the currency’s almost 6 percent gain against the dollar in the past year is further jeopardizing price stability by cheapening imports and hurting exporters.

The elevated rhetoric, echoed by other ECB officials, was a theme of weekend meetings of the International Monetary Fund and World Bank that global policy makers used to urge European officials to address lackluster inflation before it turns into Japanese-style deflation.

The euro slid against all except two of its 16 major counterparts and was down 0.4 percent at $1.3827 at 1:30 p.m. Frankfurt time. The currency climbed 1.3 percent against the dollar last week.

Europe's QE Quandry

“More needs to be done to support growth and guard against further disinflation in the euro area,” U.S. Treasury Secretary Jacob J. Lew said on April 11, adding he was “concerned by inflation rates consistently below target and weak demand.”

The strong euro is “a serious preoccupation,” Bank of France Governor Christian Noyer said, adding that the “overshooting of the exchange rate should correct itself.”

Currency Effects

Inflation would be about 1 percent without the exchange rate’s advance, twice the 0.5 percent of March that was the weakest in more than four years, he said. The ECB has pledged to return the rate to just under 2 percent.

While the Frankfurt-based central bank doesn’t have a currency target, the exchange rate “impacts on inflation and we have an inflation mandate,” Executive Board member Benoit Coeure told Bloomberg Television on April 11. “So the stronger the euro, the more need for monetary accommodation.”

Policy makers have ratcheted up their warnings that the euro’s appreciation could trigger policy action after Draghi said on March 6 that a climbing currency “might influence our price-stability objective.”

“I’ve always said that the exchange rate is not a policy target, but it’s important for price stability and growth,” Draghi said in Washington. “And now, what has happened over the last few months, it’s become more and more important for price stability.”

QE Discussions

The ECB is already considering whether to introduce more stimulus, including possibly quantitative easing. It will probably act to ease monetary policy within two months, according to two-thirds of respondents in a Bloomberg survey.

Echoing Lew, IMF Managing Director Christine Lagarde pressed the ECB to keep policy accommodative and welcomed its attention to low inflation. “We were very encouraged to hear that the ECB has available, and will use in due course and if necessary, the appropriate tools to deal with it,” she said.

Bundesbank President Jens Weidmann, also speaking to reporters in Washington, said the “euro appreciation is partly due to capital inflows, in particular into the euro periphery.”

The gains show “a return of confidence in the euro area,” Weidmann said. The exchange rate “is one of many factors for our inflation assessment and, therefore, we are considering” its effects, he said.

Fund Flows

International investors are returning to the region, including to nations that received bailouts in the depths of the crisis. U.S. exchange-traded funds show net inflows of almost $100 million in Greece this year and the country returned to the bond market last week with the sale of 3 billion euros of five-year notes.

While there are signs that the sovereign-debt crisis in the euro area is abating, German Finance Minister Wolfgang Schaeuble warned investors against celebrating prematurely.

“It’s good that markets have become more confident again,” Schaeuble told reporters in Washington on April 12. “But I’ve said that in parts they’re already exaggerating again.”

Weidmann echoed Schaeuble in saying there are concerns that optimistic investors may tempt indebted countries to become complacent.

“There’s a discussion about a stability risk that’s created by financial markets in a certain way running ahead of adjustment processes,” he said.

To contact the reporters on this story: Stefan Riecher in Washington at sriecher@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Paul Gordon, Kevin Costelloe

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