ECB cites inflation-dampening exchange rate as policy factor

ECB cites inflation-dampening exchange rate as policy factor
ECB chief Mario Draghi.

By Reuters

Published: Thu 7 Sep 2017, 9:00 PM

Last updated: Thu 7 Sep 2017, 11:15 PM

The European Central Bank (ECB) must take into account the weakening of inflation due to the strong euro as it prepares to wind down its unprecedented stimulus programme, ECB chief Mario Draghi said on Thursday.
Draghi was speaking after the ECB kept rates at record lows and confirmed that asset purchases would continue at ?60 billion ($71.76 billion) per month at least until December, suggesting a long-awaited tapering of stimulus could come more gradually than some market players currently anticipate.
That possibility was further reflected in the eurozone central bank's move to trim inflation forecasts for next year and 2019, largely due to the euro's 13-per cent rally against the dollar this year on the back of a solid economic recovery.
"The medium-term outlook for inflation was revised downward in the staff's projections, mainly due to the appreciation of the exchange rate, which means we will have to take account of this element of our information set in policy decisions," Draghi told his regular news conference after the rates decision. He added that there was now broad consensus within the ECB that currency volatility was a "source of uncertainty" in formulating monetary policy.
Underlining the dilemma faced by the ECB, the euro rose to a nine-day high above $1.20 as Draghi spoke.
Earlier, the bank left its guidance completely unchanged, even retaining the option of boosting asset buys if needed.
"If the outlook becomes less favourable... the Governing Council stands ready to increase the programme in terms of size and/or duration," it said.
The key problem for the ECB in deciding whether to continue or wind down the asset purchases is that while growth is robust, inflation will remain under the ECB's target of almost 2 per cent for years to come given a sizeable slack in the labour market and the absence of meaningful wage growth.
Draghi cited the strong euro as a reason for the lower inflation forecasts, with price growth now seen at 1.2 per cent next year compared with 1.3 per cent predicted in June and at 1.5 per cent in 2019, down from 1.6 per cent.
Though the ECB has preferred to tailor its message by the smallest of increments, time is running out for a decision as the scheme is due to end in December and the ECB has only two more rate meetings this year, on October 26 or December 14.
Draghi simply reiterated that policymakers would decide this autumn, adding: "Probably the bulk of these decisions will be taken in October."
Hawkish rate-setters led by Germany argue that the scheme has reached its potential so it should be wound down. But "doves" say that a rapid exit could tighten financial conditions too much, undoing the programme's successes.
Analysts polled by Reuters predicted no policy change on Thursday and expect bond buys to be cut by one-third in a decision later this year. - Reuters




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