ECB to monitor impact of stronger euro

The European Central Bank will monitor the economic impact of a strengthening euro but has said it was not an immediate cause for concern.

Remarks by ECB president Mario Draghi yesterday were taken by analysts as a signal that further euro rises might open the door to an interest rate cut, after the bank’s governing council left its main interest rate untouched at 0.75 per cent.

“The appreciation is, in a sense, a sign of return of confidence in the euro,” said Mr Draghi.

The ECB president dismissed talk of a “currency war”, saying he saw no deliberate return to competitive devaluations of the past. Any fluctuations were an indirect result of efforts to stimulate growth.

Price stability

Even after hitting a 15-month high against the dollar last week, he said, the euro remained within its long-term average corridor. The single currency’s value was not an ECB policy target, Mr Draghi added, though it played a role in growth and price stability.

“We certainly want to see whether the appreciation is sustained,” he said, “and we will alter our risk assessment as far as price stability is concerned”.

His remarks follow a call by French president François Hollande to create an exchange rate policy to shield the single currency from “irrational movements”.

The ECB president gave an upbeat assessment of the euro zone’s economic prospects in the year ahead, with growth likely to resume later in 2013, prompting a gradual overall recovery. Inflation in 2013 is likely to drop below the bank’s target of 2 per cent.

He noted a pick-up in global demand and an improvement in financial market conditions, evidenced by data showing repayments by banks of the ECB liquidity made available at the height of the euro zone crisis.

Banks have repaid to date €140.6 billion of the €489.2 billion issued in long-term refinancing operation loans.

Asked about efforts by France and Germany to force their banks to ring-fence riskier trading activities, he said they “did not differ radically” from proposals being studied by the European Commission and could eventually be merged.

Derivatives

“I think it is quite obvious we cannot afford to go on with our own with separate legislation,” he said.

The former Italian central banker was pressed about what he knew of a 2006 derivatives scandal at the Monte dei Paschi, Italy’s oldest bank.

The Siena-based institution is facing losses of about €1 billion from trades in derivatives and structured finance products. Mr Draghi insisted the central bank he once headed had “done everything it should and appropriately and on time” regarding the crisis-hit bank.

The case underlined the need for a future European bank regulator to be given powers to intervene in failing institutions, including the power to remove managers not considered “fit and proper”.

“I think one thing this story shows in that having more powers would have helped, although when you have to deal with fraud, you never know,” he said.