ECB watching euro's exchange rate: Draghi

The euro's appreciation is a sign of returning confidence but the ECB is watching to see if it affects the inflation outlook, ECB President Mario Draghi said

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After complaints that the single currency’s exchange rate was too high and was hurting economies in the eurozone, European Central Bank (ECB) President Mario Draghi said the recent moves could be a sign of increasing confidence in the markets.

“On the exchange rate, the first thing is that the appreciation is in a sense a sign of return of confidence in the euro. Net of the return of confidence, exchange rates should reflect fundamentals. And by and large, both the nominal and the real exchange rate are around their long-term level,” Draghi told journalists after the ECB left interest rates unchanged.

“We want to see if the appreciation, if sustained, will alter our risk assessment in terms of price stability.”

Draghi said the central bank will have an assessment of the outlook for inflation next month. “In the meantime we will maintain our accommodative monetary policy stance,” he said. He also said the exchange rate should not be a policy target.

The euro fell after the comments, as investors believe they mean that the central bank will see any tightening of monetary conditions, including via the exchange rate, as a reason to act to loosen monetary policy.

French President Francois Hollande complained about the euro’s strength, advancing the idea of some “guidance” for the single currency, to protect the eurozone economy from “unfair” competition from abroad, while preventing “irrational swings” of the exchange rate in the short term.

“I think we should always remember that the ECB is independent. We heard all over the world now talking up, talking down currencies. The ultimate judgment of the effectiveness of these strategies is to see what the market makes of these statements,” Draghi said.


Risks for the eurozone economic outlook “continue to be on the downside” because of the possibility of weaker-than-expected exports and demand, slow implementation of structural reforms in the single currency area and geopolitical issues and imbalances in industrialized countries, which could impact commodities and financial markets. 

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“These factors have the potential to dampen the ongoing improvement in confidence and thereby delay the recovery,” Draghi said.

“Inflation rates are expected to decline further to below 2% in the following months. Underlying price pressures should remain contained.”

He maintained his forecast for a gradual recovery in the second half of this year and listed some signs that things were on the right track.

Among these: the fact that funding for banks was 65% higher this month than in the same month last year, that 55% of sovereign bond issuance this year came from non-core countries compared with last year when 95% of sovereign issues were done by core countries, and that Portugal and Ireland tapped the medium to long-term end of the market.

“The repayment of the LTRO is a sign of confidence. It simply says that a lot of banks accessed the LTRO for precautionary reasons,” Draghi said. “When we estimate repayment for the second LTRO, we are quite persuaded that the excess liquidity will be well over 200 billion, confirming the monetary stance is accommodative.”

He also noted that the current account surpluses of troubled eurozone members continued to increase and that unit labour costs in most of these countries continued to decrease, helping the necessary rebalancing.

“But the situation remains fragile,” said Draghi, adding that credit flow was still weak while the rebound in corporate debt issuance was due to big companies that can finance themselves on the capital markets, but small and medium size companies were “actually constrained” as they need to finance themselves from banks, which are still tight.

“It appears that small banks are tighter than large banks. All in all, credit costs and availability remain challenging,” Draghi said.

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