European Central Bank (ECB) President Mario Draghi said on Thursday his forward guidance may help to drag the 18-bloc euro currency lower and reduce interest rates, which could help inflation return to the goal set by policymakers.
“Our forward guidance … creates a de facto loosening of policy stance, as real interest rates are set to fall over the projection horizon,” Draghi said in Vienna yesterday. “At the same time, the real interest-rate spread between the euro area and the rest of the world will probably fall, thus putting downward pressure on the exchange rate, everything else being equal.”
The comments made by the ECB President dragged the euro lower from its two-year high against the greenback. The euro edged 0.02% lower trading at $1.3864 at the time of writing; the currency reached $1.3967 earlier in the day, the highest since October 2011.
Draghi stated at the last ECB monetary policy press conference, that the ”strengthening of the effective euro exchange rate…has had a significant impact on our low rate of inflation and, given current levels of inflation, is therefore becoming increasingly relevant in our assessment of price stability.”
“Given that the ECB’s staffs’ average forecast for inflation in 2016 is already low at 1.5%, it clearly signals that a further significant strengthening of the euro would likely trigger additional ECB easing by increasing the likelihood that inflation undershoots their target,” Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi wrote in a note on Friday.
Hardman added “The EUR/USD rate may be able to rise towards the 1.45-level before triggering further ECB easing which would weigh more heavily upon the euro. ECB President Draghi remains optimistic that the ECB’s forward guidance will over time place downward pressure upon the euro as the real interest rate spread between the euro area and the rest of the world will probably fall. However, in the near-term the ongoing shrinking of the ECB’s balance sheet continues to support a stronger euro making ECB monetary policy appear relatively tight.”
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