Frankfurt – European Central Bank (ECB) President Mario Draghi has announced that he will launch an exit plan from the billion-dollar bond purchases in October. At the same time, he also expressed concerns about the recent appreciation of the euro.
After a long silence, Draghi has commented on the appreciation of the euro since the beginning of the year. The latest fluctuations in the euro rate are a “source of uncertainty” and required surveillance, he said after the interest rate meeting. The euro did not react to the remarks with price losses, but even rose. Last, he cost a little more than $ 1.1998 before the statements. For a short time, the price had risen to $ 1.2059.
Euro rate dampens inflation
Draghi stressed that the euro rate is still not an objective of ECB monetary policy. However, it has an impact on growth and inflation. A higher euro exchange rate makes euro area exports more expensive and cheaper for imports into the euro area. As a result, this can put pressure on economic growth and reduce inflation. Asked by a journalist what level of price is appropriate from his point of view, Draghi said he basically does not comment on exchange rates.
Concerns over the strength of the euro seem to make the ECB think, according to Thimothy Graf, economist at financial services provider State Street. “Draghi’s attempt to highlight the strength of the euro seems to have only strengthened the euro even more,” writes the economist.
Exit plan to be presented in October
Draghi has promised to make early decisions on how to proceed with the Federal Reserve’s multi-billion dollar asset purchase program. “Most of the decisions are likely to be made in October,” Draghi said. However, unforeseen developments could lead to a shift. The next meeting of the Governing Council will take place on 26 October.
For the time being, no concrete monetary policy options were discussed at the current meeting, Draghi said. However, it was generally spoken both about the duration and about the volume of securities purchases. The discussion about an exit is still at an early stage. However, Draghi expects to be ready in October.
First, however, the previous course was confirmed. The bond purchase program is to be continued until at least the end of 2017. Even an expansion of monthly purchases is still mentioned as an option. The key rate remains at zero percent and, according to Draghi, should remain low for quite some time after the end of bond purchases.
ECB can deal with shortages
“There was no talk of the possible shortage of bonds,” Draghi said. However, the central bank has shown that it can deal with shortages. The ECB had promised that it would not hold more than a third of all possible government bonds in a country. About a change of these limits was not spoken. Economists expect the ECB to reach its limits next spring. Extending the program to other securities, such as equities, was not discussed, according to Draghi.
“If an adjustment to the asset purchase program is announced in October, it will not be because the ECB has met its inflation targets, but solely on regulatory grounds,” said Thomas Gitzel, chief economist at VP Bank. If the Frankfurt monetary watchdogs continued to buy without restraint, they soon violated the purchase limit of 33 percent per issuer. But because there are regulatory and not economic reasons for reducing monthly asset purchases, the ECB will be extremely cautious. “
The central bank has raised its forecast for economic growth in the euro area this year. In 2017, the central bank expects economic output to increase by 2.2 percent. So far, the projection was at 1.9 percent. In contrast, inflation forecasts were partially lowered. Draghi justified this also with the strong euro course. For the coming year, the central bank expects consumer prices to increase by 1.2% instead of the previous 1.3%. By contrast, the forecast for the current year was left at 1.5 percent.