European Central Bank (ECB) President Mario Draghi said Thursday that the recent volatility in the exchange rate is a “source of uncertainty” and it therefore requires monitoring.
The euro has been on an upward trend against other currencies, including the U.S. dollar, for the past few weeks as the region’s economy keeps improving and political risks dissipate. However, a stronger euro could hurt European exports and affect inflation in the euro zone — which the central bank has tried to support in the last few years — potentially prompting a change in its policy.
On Thursday, the ECB left its benchmark interest rate unchanged, quashing heightened expectations of an immediate change to monetary policy in 2018.
The ECB’s interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility were kept at zero, 0.25 and -0.40 percent respectively.
Earlier in the month, the ECB’s December meeting minutes said the central bank should revisit its communication stance in “early” 2018, prompting market participants to forecast policymakers were preparing to reduce their massive monetary stimulus program. The minutes, which were published on January 11, immediately pushed the euro more than 0.7 percent higher against the dollar, extending the single currency’s rally throughout the opening days of the calendar year.
Euro strength is seen as one the main challenges to the central bank, as a stronger currency tends to soften inflation by making exports more expensive and imports cheaper.
The euro has gained more than 2 percent since the start of 2018 as a broadening recovery bolstered expectations the ECB may be forced to unwind its policy stimulus sooner than forecast. The euro zone is seeing its best economic growth in a decade, leading economists and policymakers to upwardly revise their economic forecasts for several major European countries. Late last year, the ECB increased its growth forecast for 2018 to 2.3 percent, up from 1.8 percent previously.
Nonetheless, the ECB has long-struggled to bring up core inflation to its aim of about 2 percent and the central bank is not projected to meet its target level until 2020 at the earliest.
Late last year, the bank said headline inflation would be at 1.5 percent in 2017 and 1.2 percent in 2018.
In October, the ECB announced a reduction in the level of its monthly purchases from 60 billion euros ($71 billion) to 30 billion euros. At that time, the bank also said that its quantitative easing program would stay in place until September 2018. It kept the door open to further extensions in the program, depending on the economic conditions of the euro area.
