Mario Draghi’s strategy for reviving the euro area looks like devaluation.
While the European Central Bank president says the exchange rate isn’t a policy target, officials aren’t secretive about their approval of the currency’s almost 10 percent slide. The depreciation increases the cost of imports and boosts exporters’ competitiveness, aiding the effort to revive inflation that data tomorrow will probably show is the weakest since 2009. A gauge of economic confidence published today slipped to the lowest since November, Bloomberg reported.
The euro dropped from a 2 1/2-year high in May as officials unveiled a medley of stimulus measures, and consolidated below $1.30 when Draghi cut rates this month and signaled a desire to grow the ECB’s balance sheet by as much 1 trillion euros ($1.3 trillion). Details of a plan to buy assets will probably come this week after the Governing Council meets in Naples, Italy.
Since the last meeting, Governing Council members have joined a chorus of officials highlighting the role of the euro, while Draghi said the devaluation reflects a divergence between Federal Reserve and ECB policy. Such remarks evoke language used in competitive devaluations, where nations try to boost exports by driving their currencies down.
The ECB may look past conventional measures to maintain pressure on the euro after saying this month that interest rates have reached the lower bound. The 24-member council will leave the benchmark rate unchanged at 0.05 percent and the deposit rate at minus 0.2 percent on Oct. 2, according to all economists in a Bloomberg News survey.
The currency slumped as low as $1.2664 today (Monday), the weakest since November 2012, after reaching $1.3993 on May 8, just before Draghi said officials were “comfortable” with taking action. He then cut interest rates twice, offered cheap long-term loans to banks and announced a plan to buy asset-backed securities and covered bonds.
Slowing Inflation
Draghi told reporters in March that “as a rule of thumb” each 10 percent permanent effective exchange-rate appreciation lowers inflation by around 40 to 50 basis points.
“One of the major impacts we sought with our decisions was on the exchange rate,” Belgium’s Luc Coene said in a Bloomberg News interview after the September decision. Italy’s Ignazio Visco said a weaker euro is “the right response” to the ECB action.
Whether the policy will also be effective in boosting consumer prices remains to be seen. Inflation probably slowed to 0.3 percent this month, a fraction of the ECB’s goal of just under 2 percent, according to the median of 36 estimates in a Bloomberg survey. The bank’s preferred measure of medium-term inflation expectations is near a four-year low.
