BLBG: Draghi Signals Euro Strength May Damp ECB Inflation Outlook
European Central Bank President Mario Draghi signaled policy makers are concerned that the euro’s advance could damp inflation and hamper an economic recovery.
“The exchange rate is not a policy target, but it is important for growth and price stability,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark rate at a record low of 0.75 percent. “We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.”
While latest data show the 17-nation euro economy is starting to stabilize after the sovereign debt crisis drove it into recession last year, the euro’s gains could hurt exports and stymie a recovery before it has begun. Draghi stressed that ECB policy remains accommodative, and said low rates should help to fuel growth later this year. Still, risks to the economic outlook remain on the downside, he said.
“The market is reading the comments as generally downbeat,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London. “That and the comments about the risks to inflation have pushed the euro down.”
Euro Drops
The euro fell as Draghi spoke, dropping more than half a cent to $1.3474. It reached a 14-month high against the dollar this month and a three-year high against the yen. It has climbed 11 percent on a trade-weighted basis since Draghi pledged on July 26 to do whatever is needed to preserve Europe’s monetary union, a comment that helped end the turmoil raging through the region’s bond markets.
“The euro is a little bit too strong,” Bernard Charles, Chief Executive Officer at the French software maker Dassault Systemes SA, said in an interview with Bloomberg Television today. This will “have an effect this year” on the economy and its “capacity to export,” he said.
Draghi said inflation risks are contained, allowing the ECB’s policy “to remain accommodative,” and economic weakness will prevail only “in the early part” of this year.
“Later in 2013, economic activity should gradually recover, supported by our accommodative policy stance,” he said. The ECB will publish new economic projections next month and “in the meantime we will maintain our accommodative monetary stance.”
The Bank of England kept its target for bond purchases at 375 billion pounds ($589 billion) today and left the key rate at a record low of 0.5 percent.
To contact the reporter on this story: Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
