ECB Officials Walk a Fine Line in Struggle to Contain Euro Gains

(Bloomberg) -- European Central Bank policy makers are attempting to strike a delicate balance between voicing concerns about the euro’s surge and avoiding any impression that they’re deliberately trying to weaken the currency.

So far, the results are mixed. The euro rose for a third day Friday and edged closer to the more than two-year high it reached last week, despite a raft of comments from officials. Yet using more forceful language could see them accused of inciting a currency war.

“The messages seem unclear,” said Mike Riddell, portfolio manager at Allianz Global Investors. “It’s a difficult communication exercise, where there is a risk that it’s viewed that the ECB is talking down the euro.”

The central bank’s concerns are motivated by the downward pressure on prices from the currency’s appreciation, which cuts the cost of imports and erodes the competitiveness of exports. That makes the ECB’s job of steering inflation back toward its target in the wake of the coronavirus recession much harder.

ECB chief economist Philip Lane came out with the strongest comments on Friday, saying the euro’s more than 10% jump since March dampened the inflation outlook, and stressing that the institution stands ready to add more monetary stimulus if needed. The central bank’s updated projections show inflation averaging 1.3% in 2022, well below the goal of just-under 2%.

Milder Musings

That’s a tougher tone than President Christine Lagarde adopted a day before when she said the exchange rate needs to be monitored. She didn’t address the topic directly at a press conference with euro-area finance ministers on Friday, instead warning all policy makers -- including governments -- against complacency in combating the economic slump.

Other central bankers who spoke Friday were less forthright than Lane. French governor Francois Villeroy de Galhau said the exchange rate “does matter for inflation and monetary policy” and will be monitored. Lithuania’s Vitas Vasiliauskas argued that the appreciation isn’t especially exceptional.

Such wariness reflects in part a reluctance to get involved in a spat over competitive devaluations, which major economies have long agreed to avoid. U.S. President Donald Trump has previously attacked other countries on the issue.

This time the Federal Reserve’s decision to temporarily tolerate higher inflation, unveiled by Chairman Jerome Powell at the end of August, has contributed to the euro’s recent rally.

The 19-nation euro zone has also been recovering relatively quickly from the pandemic slump. The ECB’s quarterly forecasts released on Thursday included a less-steep contraction this year than expected only three months ago.

“The ECB has taken note of the big-picture changes in global macro dynamics and correctly decided that a few points on euro-dollar isn’t a hill they wish to spend their limited ammunition and credibility defending,” said Ranko Berich, head of market analysis at Monex Europe.

Policy makers agreed to leave their bond-buying plan unchanged at 1.35 trillion euros ($1.6 trillion) and deposit rate at minus 0.5% for now, but that could change if the recovery doesn’t pick up.

Economists surveyed before the latest policy meeting predicted that the bond program will be increased by about 350 billion euros before the end of the year.

Euro area bonds rose after Lane’s blog. Money market bets indicate there’s a 50% probability that the ECB will lower the deposit rate 10 basis points in April.

“It’s common for central bankers to say they don’t target the exchange rate, and only pay attention to those developments when they affect the wider economic momentum and inflation,” said Joerg Kraemer, chief economist at Commerzbank AG, who predicts the bond program will be boosted around the turn of the year. “If the euro is going to accelerate faster, then the arguments in favor of boosting stimulus will get even stronger.”

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