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Euro Frustrates ECB Policy Makers as Stimulus Debate Heats Up

Updated on
  • Constancio concerned if moves don’t echo fundamentals
  • Comments come after some policy makers urged end-date for QE

Euro Frustrates ECB Policy Makers Amid Stimulus Debate

The European Central Bank’s second-highest official waded into the debate over euro-area monetary stimulus after some policy makers expressed concerns over the single currency’s recent gains.

Vice President Vitor Constancio cast his lot with Governing Council members Francois Villeroy de Galhau and Ewald Nowotny, who argued over the past two days that a stronger euro may harm ECB efforts to return inflation to the goal of just under 2 percent.

“I am concerned about sudden movements” in the exchange rate “which don’t reflect changes in fundamentals,” Constancio said in an interview with Italy’s La Repubblica newspaper published Wednesday. “Looking at fundamentals, inflation declined slightly in December.”

The vice president, generally considered one of the most dovish ECB officials, outlined his position a week ahead of the Governing Council’s Jan. 25 meeting to set monetary policy. The euro has risen to the strongest against the dollar in more than three years amid signs that robust economic growth has prompted policy discussions over whether the ECB should tweak its guidance on stimulus.

Read more: Euro Unruffled by ECB Officials’ Concerns Awaits Draghi Verdict

The single currency’s gains have the potential to weigh on inflation, which the ECB forecasts won’t reach its goal before at least the end of 2020. At the same time, surging energy costs are putting upward pressure on prices.

Constancio signaled that there is little prospect of a change to policy language next week, arguing that officials should be careful not to “choke off growth too soon.” The ECB currently pledges to keep bond purchases running at a monthly pace of 30 billion euros ($37 billion) until at least September and extend them if needed, and only raise interest rates well after buying stops.

Some of the Governing Council’s more-optimistic members have expressed a preference to move ahead with plans to unwind unprecedented stimulus.

Bundesbank President Jens Weidmann, a frequent critic of quantitative-easing, said in an interview published Tuesday that he considers an end to bond buying this year would be “appropriate from today’s perspective.” He also said analysts’ expectations that interest rates won’t rise before the middle of next year are reasonable.

Estonia’s Ardo Hansson took a more combative stance, arguing that forward guidance should be adjusted before the summer, and that there shouldn’t be any problems with ending net asset purchases in one swoop after September. He also said that the euro’s appreciation so far “is not a threat to the inflation outlook,” and one “shouldn’t overdramatize” it.

The euro has gained almost 4 percent since the ECB’s previous policy meeting on Dec. 14, though it has stumbled in the past two days. The currency was down 0.4 percent at $1.2216 at 12:51 p.m. Frankfurt time.

Talking Down

The last time the ECB actively addressed the euro was in September, after the currency had surged more than 14 percent against the dollar from the start of the year. President Mario Draghi said at the time that the euro was a “source of uncertainty which requires monitoring.” It weakened over the following two months.

Villeroy echoed those words this week to underline his recommendation for not pushing ahead with a stimulus exit.

“We are predictable as to the direction of our policy and the sequencing,” he said. “But we are not pre-committed in terms of precise timing. We will make this contingent on the actual progress made in achieving our inflation objective.”

— With assistance by Vassilis Karamanis, Carolynn Look, and Boris Groendahl

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