The European Central Bank (ECB) will ease monetary policy further if the euro keeps strengthening, bank President Mario Draghi said on Saturday as world finance leaders raised pressure on Europe to ward off deflation.
In the clearest signal yet that the ECB is prepared to launch a stimulative asset-purchase program, Draghi said the euro’s exchange rate had become increasingly important to policy and would act as a trigger.
“The strengthening of the exchange rate would require further monetary policy accommodation. If you want policy to remain as accommodating as now, a further strengthening of the exchange rate would require further stimulus,” he told a news conference.
Weak eurozone inflation took center stage on Saturday, with the IMF’s steering committee urging the ECB to consider acting if low inflation became persistent.
“The fund is recommending more monetary easing to the ECB, and rightly so,” Brazilian Finance Minister Guido Mantega said..
The world’s financial markets are watching closely.
Last week, the ECB kept interest rates steady, but opened the door to turning on its money-printing presses to boost the weak eurozone. At that time, Draghi said the ECB had achieved unanimity that asset purchases, or so-called quantitative easing, might be needed.
Over the past 12 months, the euro has strengthened by nearly 5.5 percent against the US dollar and by about 10 percent against the Japanese yen. It has reached levels against the US dollar not seen since late 2011. It ended last week at just below US$1.39.
Draghi on Saturday said that euro appreciation over the past year was an important factor in bringing inflation in the currency bloc down to its current low levels, accounting for as much as a half percentage point of the decline in the annual rate, which stood at 0.5 percent year-on-year last month. The ECB aims to keep inflation close to, but under, 2 percent.
“I have always said that the exchange rate is not a policy target, but it is important for price stability and growth,” Draghi said. “What has happened over the last few months is that it has become more and more important for price stability.”
In July 2008, the currency’s rise to an all-time high of US$1.60 did not trigger an ECB response, even though eurozone finance ministers tried to talk down the currency. However, inflation was near an all-time high at 4 percent, checking price growth.
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