European Central Bank President Mario Draghi said a further appreciation of the euro would trigger more monetary stimulus in his strongest warning yet about the region’s rising currency.
“The strengthening of the exchange rate would require, to make our monetary policy stance to remain equally accommodative, it would require further monetary policy accommodation,” Draghi told reporters in Washington yesterday. “The strengthening of the exchange rate requires further monetary stimulus. That’s an important dimension for our price stability.”
The toughest in a series of currency comments from Draghi and fellow ECB officials came after the euro appreciated 6 percent versus the dollar over the past year. A rising exchange rate threatens the central bank’s ability to deliver inflation of just below 2 percent because it would cheapen imports and hurt exporters.
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.”
The euro closed at $1.3885 on April 11, up 1.3 percent last week.
Draghi, attending spring meetings of the International Monetary Fund, said the euro had a “significant” impact on price stability. He has ratcheted up his rhetoric since saying March 6 the 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,” he said. “And now, what has happened over the last few months, it’s become more and more important for price stability.”
Draghi is already considering whether to introduce more stimulus including possibly quantitative easing after the inflation rate of the 18-nation euro area dropped to 0.5 percent in March, the lowest level in more than four years. The ECB will probably act to ease policy within two months, according to two-thirds of respondents in a Bloomberg survey.
ECB Governing Council member Jens Weidmann, also speaking to reporters yesterday 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” the effects of a stronger euro he said.
The inflation rate would be at about 1 percent without the currency’s appreciation, France’s central bank Governor Christian Noyer said yesterday.
The strong euro is “a serious preoccupation,” Noyer said, adding that the “overshooting of the exchange rate should correct itself.”
IMF Managing Director Christine Lagarde said yesterday that the ECB needs to keep being accommodative and that she welcomed its willingness to use extra tools if needed.