The ECB’s Good-News Problem: the Euro

The ECB has faced more challenges than many central banks in recent years. Now finally it is wrestling with how to manage good news.

By Richard Barley

European Central Bank President Mario Draghi. The account of the ECB’s July meeting fired a shot across the euro’s bows, but is unlikely to upend the single-currency’s strength. Photo: remko de waal/European Pressphoto Agency

For a central bank, even good news isn’t entirely straightforward.

The account of the European Central Bank’s July meeting, published Thursday, betrayed clearer concerns about the rising euro exchange rate than President Mario Draghi had shown at the postmeeting press conference.

Markets have been on alert for a signal from the ECB that the sharp rise in the euro—up 11.1% against the dollar and 6.5% against sterling so far this year—was becoming a worry. The meeting account duly delivered, singling out the foreign-exchange market as being at risk of “overshooting” in the future. The euro dipped briefly in response.

Performance of the euro against the U.S. dollar and sterling

The ECB also acknowledged that the euro was rising for good reasons, including a reduction in eurozone political risk, a brighter growth outlook, and a reappraisal of U.S. interest-rate policy.

And other financial conditions remain supportive, with bond yields still low and corporate-bond spreads tight.

Importantly, the account also repeated a key element of Mr. Draghi’s June speech in Sintra, Portugal, that shook markets up. As economic growth becomes increasingly self-sustaining, it is less dependent on ultraloose policy settings.

The ECB, understandably, is playing for time as it waits for more concrete evidence that inflation is firming. And it noted that with financial markets hanging on central bankers’ every word, a “steady approach to communication” is important.

Markets have been focused on the euro because of the relative speed of its ascent since May. A further swift climb could give the ECB reason for pause. But as long as eurozone growth continues and other financial conditions remain supportive, the ECB will remain on track for a gradual winding-down of extraordinary monetary policy. Euro strength won’t be so easily upset.

0 comentarios:

Publicar un comentario