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Draghi Says ECB Forward Guidance May Help to Curb Euro

March 14 (Bloomberg) -- European Central Bank President Mario Draghi said his forward guidance may help to weaken the euro and lower real interest rates, easing the risk that inflation won’t return to the goal set by policy makers.

Guidance “creates a de facto loosening of policy stance, as real interest rates are set to fall over the projection horizon,” Draghi said in Vienna yesterday. “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.”

Draghi’s comments add to those after last week’s monetary-policy meeting when he said a strengthening euro since 2012 has kept consumer prices subdued. While the exchange rate isn’t a policy target for the ECB, Draghi said that the currency’s level is becoming “increasingly relevant in our assessment of price stability.”

The euro has gained about 6.6 percent against the dollar in the past year and is up 6.9 percent against a basket of developed-market peers. The currency fell today after declining 0.3 percent yesterday following Draghi’s remarks. It had reached $1.3967 earlier in the day, the highest level since October 2011.

Economists are split on whether the ECB would act to prevent the euro from strengthening, according to the Bloomberg Monthly Survey published yesterday. Twenty-one of 40 respondents said the ECB would interfere, while 20 said they wouldn’t, according to the survey carried out March 7-12.

Too-Low Inflation

The ECB’s forward guidance states that policy makers will keep official interest rates at present or lower levels for an extended period of time.

Draghi said that too-low inflation is “currently more relevant” than too-high inflation, though the risk of deflation is “quite limited.” Consumer price growth was 0.8 percent in February, less than half the ECB’s definition of price stability.

“Any material risk of inflation expectations becoming unanchored will be countered with additional monetary policy measures,” Draghi said.

To contact the reporter on this story: Fergal O’Brien in London at fobrien@bloomberg.net

To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.net Paul Gordon, Zoe Schneeweiss

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