Mario Draghi says ECB mandate is to target inflation, not exchange rate
ECB President's words sent euro to lowest level against U.S. dollar in two weeks
Some policy makers fear Draghi's words have makings for global currency war
ECB governing council decided to keep interest rates on hold at 0.75 per cent
Mario Draghi, European Central Bank president, on Thursday intervened in what some policy makers fear has the makings of a global currency war, sending the euro to its lowest level against the dollar in nearly two weeks.
The recent strength of the euro has alarmed European businesses and politicians since a sustained rise could kill off early signs that the battered eurozone might return to growth this year as exports pick up.
But with central banks around the world adopting ever looser monetary policies and in some cases, like Japan, bowing to overt political pressure to do so, concerns have grown of a series of competitive devaluations dubbed a currency war as nations try to ensure their exports remain competitively priced.
After the ECB’s monthly interest rate-setting governing council kept rates on hold at 0.75 per cent, Mr Draghi reiterated that the bank’s mandate was to target inflation – or maintain price stability – and not the exchange rate.
But he added: “We want to see if this appreciation is sustained and if it alters our assessment of price stability.”
He also issued a veiled rebuke to François Hollande, France’s president, who this week called for a “managed exchange rate” – comments that had little effect on the euro.
“President Hollande. Well, we should always remember that the ECB is independent,” he said. “We heard all over the world now talking up, talking down currencies. The ultimate judgment of the effectiveness of this strategy is to see what markets make of these statements.”
The euro fell below $1.34 against the dollar for the first time since January and suffered heavy losses against the UK pound and the Japanese yen. The single currency is trading close to its strongest level in 15 months against the dollar as improved sentiment about the bloc has seen investors flood back in.
“Mr Draghi pulled off quite a feat,” said Nick Spiro, managing director of Spiro Sovereign Strategy. “He managed to talk down the euro while talking up the eurozone.”
Valentin Marinov, currency strategist at Citigroup, said: “Investors will be mindful of the fact that further excessive currency strength could trigger an ECB response sooner than expected.”
Against the backdrop of a perception that the ECB is the only big central bank left that is in effect tightening – because it is shrinking its balance sheet by letting banks pay back some of the €1tn in cheap funding it offered last year at the height of the crisis – Mr Draghi also made at least 10 mentions of the bank’s “accommodative” stance.
Addressing the threat of a currency war, Mr Draghi said he did not think exchange rates were being deliberately managed lower.
“They are more the effect of macroeconomic policies that are meant to revamp economies, for example, very low interest rates and the promise to stay low for a very long time,” he said, referring to the US Federal Reserve’s policy.
“However, if these policies produce consequences on the exchange rates that do not reflect the G20 consensus [on avoiding competitive devaluations], we will have to discuss this,” he added.
The ECB chief, recycling phrases he has used in previous months, said “risks surrounding the economic outlook for the euro area continue to be on the downside”. But the bank still sees a gradual recovery starting in the second half of the year with a reduction in financial market tensions and the financial fragmentation of the 17-nation bloc.
There are, however, plenty of clouds on the horizon. Bank lending has not recovered. As well as the fragmentation between eurozone countries that sees a company in Spain pay significantly more for a loan than one in Germany, there is similar fragmentation between large companies and small and medium enterprise, Mr Draghi noted.
“We continue trying everything we can to make sure that credit flows resume, within our mandate of course,” he said. “At the same time we believe that all the actions we’ve taken will in the end find their way through the economy.”
The 23-person governing council’s decision to keep rates on hold was unanimous, he said, but added: “Of course there were hints and discussions about how to influence financial conditions, but that is it.”