The European Central Bank is monitoring the euro's gains on currency markets as it edges toward an decision next month on the future of its bond-buying programme.
"The recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability," ECB president Mario Draghi told reporters in Frankfurt on Thursday.
The ECB opted to leave interest rates unchanged for now it started cautiously sketching out the future of its quantitative easing (QE) programme.
The decisions on QE are “many, complex, and always naturally one thinks about risks that may materialise in the coming weeks or months, so that is the caution behind not specifying a date,” Mr Draghi said.
“Probably the bulk of these decisions will be taken in October.”
The single currency rose as much as 1.2 per cent as Mr Draghi spoke to break above $1.20.
The signal that a decision on bond purchases is likely next month "makes it difficult for the ECB president to talk down the euro," said Nick Kounis, an economist at ABN Amro in Amsterdam.
“The currency market is telling Draghi that talk is cheap and it is putting more weight on the upcoming QE actions.”
The euro’s surge - more than 14 per cent against the dollar this year and almost 6 percent on a trade-weighted basis - was reflected in a downgrade to the ECB’s inflation outlook even as Mr Draghi said economic growth remains solid.
That highlights the difficulty policy makers face as they debate the future of their QE program -- which has already topped €2 trillion and is scheduled to continue at a monthly pace of €60 billion until the end of this year.
ECB staff now see inflation at 1.2 per cent in 2018 and 1.5 per cent in 2019, well below the goal of just below 2 per cent.
Still, Mr Draghi said that there was “broad satisfaction” within the ECB governing council that consumer prices will eventually converge with expectations for stronger growth.
“Financial conditions have unquestionably tightened in the euro area, but they remain broadly supportive of the non-financial companies and enterprises,” he said.
“The economic expansion, which accelerated more than expected in the first half of 2017, continues to be solid and broad-based across countries and sectors.”
The ECB chief described the discussion on the path of QE as “very, very preliminary” and that the governing council considered the “trade-offs” between various scenarios related to the pace and duration of purchases.
Policymakers want to see the work of ECB’s technical committees before deciding, he said.
He said officials did not discuss the ECB’s self-imposed limits on the proportion of bond issues it can buy, not did they talk much about the risk the central bank will run out of debt to buy.
“We haven’t discussed really the scarcity issue because so far, he said. “We’ve consistently shown that we’ve been able to cope with this issue quite successfully.”
Mr Draghi also reiterated that interest rates will be kept low for an extended period, and said officials did not discuss whether they could be raised before net asset purchases end.
