ECB’s Eye on Euro Drop Is Cited by Villeroy for Inflation Effect
(Bloomberg) — The European Central Bank is watching the euro’s drop because of its effect on consumer prices, according to the first policy maker to comment on the currency since it almost breached parity with the dollar.
“It’s good news for activity as it supports exporters, but unfortunately it raises inflation a bit,” Bank of France Governor Francois Villeroy de Galhau told France Info radio on Wednesday. “The exchange rate isn’t something we set, but we follow it because it counts for inflation.”
With a blackout period kicking in later on Wednesday before the ECB’s meeting on July 21, the remarks could conceivably also be the last on the matter by a policy maker in the runup to a decision where they’re then set to begin raising interest rates.
The single currency’s drop to a two-decade low extended to within a whisker of parity with the dollar on Tuesday, battered by steep rate increases by the US Federal Reserve and the increasing likelihood of a recession in Europe.
Such weakness might evoke the ECB’s struggles early in its history to create a floor for the euro in foreign-exchange markets, a period when officials ultimately resorted to interventions.
The decline has been particularly sharp, given that it was trading around $1.15 in February. Moreover, the economic divergence with the US could broaden further if Russian gas supplies are cut — a scenario that’s increasingly likely, according to European Union officials.
So far, the ECB has resisted the aggressive policy tightening deployed by central banks across the world, signaling it will raise rates by a quarter-point this month. A hobbled economy makes it more likely it will stick to that slower pace, which would widen the rate differential and make the euro even less attractive for investors.
Villeroy suggested recent moves in foreign-exchange markets aren’t necessarily focused on the euro’s fundamentals.
“When we look at what’s happened since the start of the year, it’s not so much the euro that’s weak, but the dollar that’s strong, notably because it is traditionally a safe haven,” he said.
That echoes the line that ECB President Christine Lagarde took on June when questioned by lawmakers.
“Is it the euro depreciating or is it not the dollar appreciating as a result of the monetary policy that it has decided, as a result of the economic zone and the strength that it has relative to our exposure?” she said then. “What is important is that with our monetary policy, we have to respond to the situation and make sure that we address these spillovers that we will be observing and that we should counteract in this particular market.”
Questioned on inflation, Villeroy said it will remain high until the start of 2023.
“Then, unless there is a new energy shock, it should start to decline as energy prices are no longer rising so the energy component in inflation becomes zero,” he said. “What we need to do is fight inflation, reduce inflation and bring it back to 2%. That is what we are committed to.”