Letting the euro fall further would push up already record high inflation. But fighting back would require more rapid interest rate hikes, which could add to the misery for an economy already facing a possible recession.
The bank has so far played down the issue, arguing that it has no exchange rate target, even if the currency does matter. Even the accounts of its June policy meeting published on July 7 indicated no particular concern. But the market moves are now too big to play down.
“The euro’s weakness reinforces the notion that the ECB is behind the curve,” Dirk Schumacher, head of European macro research at Natixis CIB, said. “Given how high inflation is, a stronger euro would be quite helpful because it lowers inflation.” The euro is now down around 10% against the dollar this year, even if the trade-weighted currency has only dropped 3.3% so far.
This raises the cost of imports, especially for energy and other dollar-denominated commodities, making everything more expensive. Studies frequently cited by the ECB suggest that a 1% depreciation of the exchange rate raises inflation by 0.1% over one year and by up to 0.25% over three years.
, the ECB continues to take baby steps in unwinding the exceptionally easy policy of the past decade, when inflation was too low.but expects to lift the deposit rate out of negative territory only in September, with any further move clouded by recession risks.has soured so much since mid-June that one rate hike has been priced out and markets now see just 135 basis points of tightening from the ECB.
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