The European Central Bank (ECB) is closely watching how an appreciating euro is affecting inflation and will consider the impact when setting monetary policy, according to Governing Council member Francois Villeroy de Galhau.
While reiterating that officials don’t have any target for the exchange rate, the French central banker joined others in warning that further euro strength could weigh on consumer prices.
“We are closely monitoring this appreciation of the euro and its possible consequences in terms of lower inflation,” he said on LinkedIn. “This is one of the factors that will guide our monetary policy and our decisions on interest rates over the coming months.”
Eurozone inflation is currently a touch below the ECB’s 2% target and is projected to remain below that level this year and next — making some policymakers particularly sensitive to any additional downside dangers.
Speaking Tuesday to Bloomberg Television, Austrian central-bank Governor Martin Kocher said the ECB must monitor whether the euro makes more gains.
“We don’t see that at the moment,” he said. “But, of course, events that have been happening over the last couple of days contributed to some concern.”
Kocher spoke hours before President Donald Trump said he’s not concerned with the US currency’s decline, prompting the euro to briefly climb above $1.20 on Tuesday for the first time since June 2021. While it was trading just below that level on Wednesday, it’s rallied 2% against the greenback this year.
ECB Vice-President Luis de Guindos in July described an exchange rate of $1.20 as “perfectly acceptable,” but cautioned that anything above that level “would be much more complicated.”
“The ECB is expected to keep rates unchanged at its February 4-5 meeting, but the euro’s latest surge is likely to loom large in deliberations in Frankfurt. Policymakers are unlikely to strike a hawkish tone that could further fuel the currency’s rise and may instead lean against the move by underscoring the drag a stronger euro could pose to the economy. Even so, euro strength is set to remain a key disinflationary force for the bloc’s economy and any further appreciation would add to downward pressure on inflation,” say Simona Delle Chiaie and David Powell at Bloomberg.
Carsten Brzeski, global head of macro at ING in Frankfurt, said further appreciation by the common currency could prompt some to push for more monetary easing.
“If the strengthening continues, calls for a rate cut will get louder,” he said.
Before Trump’s latest comments, Villeroy had already listed a possible depreciation of the dollar among downside inflation risks that he deems at least as significant as those to the upside. On LinkedIn, he said the currency’s decline is the result of recent erratic policy choices in Washington.
“The dollar is falling significantly against most currencies, including the euro,” Villeroy said. “This is a sign of reduced confidence in light of the unpredictability of US economic policy.”
