Draghi un­fazed for now as ECB watches euro im­pact on in­fla­tion

Muscat Daily - - BUSINESS -

Frank­furt, Ger­many - If Mario Draghi is wor­ried about the strength of the euro, he’s hid­ing it well for now.

The Euro­pean Cen­tral Bank (ECB) pres­i­dent has shirked any in­vi­ta­tion so far to be­moan the re­cent ap­pre­ci­a­tion of the sin­gle cur­rency in the style of his pre­de­ces­sor Jean-Claude Trichet, who used to com­plain about ‘bru­tal’ moves that risk damp­ing growth. In­stead, Draghi has pointed to prospects for a stronger-than-an­tic­i­pated re­cov­ery, sug­gest­ing he might tol­er­ate the euro’s gain as proof that his cam­paign to re­vive the econ­omy is re­turn­ing re­sults.

“A lot of cen­tral bankers take the view that if the cur­rency rises for good, solid, fun­da­men­tal rea­sons then it’s not worth stand­ing in the way,” said Steven Bell, chief econ­o­mist at BMO Global As­set Man­age­ment in Lon­don. “The re­al­ity is that the growth out­look in Europe has changed dra­mat­i­cally -- the econ­omy is grow­ing strongly - so some cur­rency strength is only to be ex­pected.”

That re­al­ity is founded on healthy do­mes­tic spend­ing and in­vest­ment, mak­ing the re­cov­ery less vul­ner­a­ble to any damp­ing im­pact of a stronger euro on ex­ports. In­fla­tion, which the ECB is strug­gling to re­turn to­ward two per cent, may be less well in­su­lated against cur­rency gains and their ef­fect on the price of im­ports.

Pol­icy mak­ers can as­sess the im­pact of the euro’s 12 per cent jump this year when they start their dis­cus­sion about the fu­ture path of quan­ti­ta­tive eas­ing (QE) in Septem­ber. New eco­nomic fore­casts will be pub­lished at that time.

Draghi has lim­ited his com­men­tary on the euro to a few seem­ingly un­trou­bled words af­ter the gov­ern­ing coun­cil’s last meet­ing:

“The repric­ing of the ex­change rate has re­ceived some at­ten­tion dur­ing the var­i­ous ex­changes of views, and in var­i­ous ways.”

But since that July 20 meet­ing, when he ar­gued that fi­nanc­ing con­di­tions re­main sup­port­ive of a pickup in price growth, they have de­te­ri­o­rated.

The last leg in the euro’s as­cent started on June 27, when Draghi said in a high-pro­file speech that re­fla­tion­ary forces were at play, ar­gu­ing that a con­tin­ued re­cov­ery would al­low the cen­tral bank to scale back stim­u­lus.

Since then, the cur­rency has strength­ened four per cent against the dol­lar - reach­ing its high­est since be­fore QE - and more than seven per cent in trade-weighted terms. Sim­i­lar gains in 2007 trig­gered a warn­ing by then-ECB pres­i­dent Trichet that ‘bru­tal moves’ are never wel­come. (The euro traded at just un­der US$1.5 at the time, com­pared with less than US$1.2 cur­rently.)

Draghi has pre­vi­ously at- tempted to talk down the euro, when he ex­pressed ‘se­ri­ous con­cern’ about the cur­rency’s ap­pre­ci­a­tion in May 2014. He has an op­por­tu­nity to al­ter his present assess­ment af­ter his va­ca­tion, when he ad­dresses a con­fer­ence in Ger­many on Au­gust 23. He then heads to the Fed­eral Re­serve’s Jack­son Hole sym­po­sium - the venue where he put the ECB on course for large-scale as­set pur­chases three years ago.

“Back in 2014, there were con­cerns the ECB is not do­ing enough and in­fla­tion is low,” said He­tal Me­hta, se­nior Euro­pean econ­o­mist at Le­gal & Gen­eral In­vest­ment Man­age­ment Ltd in Lon­don. “This time around, what we are see­ing is that ev­ery­one is ex­pect­ing the ECB to start ta­per­ing next year and they haven’t re­ally done a lot to push back against those ex­pec­ta­tions.”

Economists pre­dict the ECB will start phas­ing out as­set pur­chases over nine months start­ing in Jan­uary, and fi­nan­cial mar­kets are pric­ing the first rate in­crease for late 2018.

Mario Draghi

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