Mario Draghi, the E.C.B. president, denied that the central bank was trying to influence the value of the euro, no doubt mindful of provoking a currency war with Japan or the United States. But he then made statements that investors interpreted as meaning the E.C.B. could take action if the euro rose too much.
“The exchange rate is not a policy target, but it is important for growth and price stability,” Mr. Draghi said at a news conference after the regular monthly policy meeting of the E.C.B.’s Governing Council, in which the central bank left its main interest rate at 0.75 percent, as expected.
Separately, the Bank of England also kept its benchmark interest rate unchanged on Thursday, at 0.5 percent, amid worries that the British economy could fall back into a recession for the third time in five years. The pound has been falling against the euro and the dollar this year, pressured by investor concerns that the British economy may not manage to recover anytime soon.
Mr. Draghi, during the news conference, was careful to avoid any explicit threat to take action to push down the euro, or to criticize any other countries. He said the euro’s current value was not far from its historical norm. But he noted that economic policy by other countries, none of which he identified, could affect exchange rates.
“Draghi’s biggest challenge was to show his magic skills of verbal interventions and to talk down the euro exchange rate,” Carsten Brzeski, an analyst at ING Bank, wrote in a note to clients. “He succeeded.”
Having traded at nearly $1.36 to the dollar earlier on Thursday, the euro dropped to below $1.34 after Mr. Draghi’s comments. In July it was trading just above $1.21.
Its record high of just below $1.60 was reached in April 2008, when the U.S. banking crisis was gathering steam.
Recent data have supported the E.C.B.’s view that the euro zone will emerge from recession this year, a view Mr. Draghi repeated Thursday. German industrial production rose 0.3 percent in December from November, according to a report Thursday, reversing a decline in the previous month and signaling a pickup in Germany, which has the largest euro zone economy.
But the recovery is threatened by the rising value of the euro, which could hurt European exports by making them more expensive for foreign buyers. In recent weeks, the euro has risen substantially against the dollar, to its highest levels in a year.
Few analysts had expected the E.C.B. to shift its monetary policy Thursday. Some predict that the benchmark rate could stay at its present level for an extended period as the euro zone slowly returns to growth.
But Mr. Draghi also emphasized Thursday that inflation was headed below the E.C.B.’s target of about 2 percent. The lack of price pressure would allow the E.C.B. space to cut rates if it chose.
Mr. Draghi argued that the appreciation of the euro “is a sign of return of confidence.” Some analysts said it could take a bigger increase in the currency’s value before the E.C.B. would consider taking action, like a cut in the benchmark interest rate.
A stronger euro means that products ranging from cars to wine become more expensive abroad, putting European producers at a disadvantage against foreign competitors. But there are also positive effects. Imports, particularly oil, become less expensive for Europeans, which helps stimulate the economy.
“The main factor behind the euro strength is the easing of the sovereign debt crisis, which is clearly positive for the euro zone growth,” Jörg Krämer, chief economist at Commerzbank, wrote in a note. “The E.C.B. is likely to tolerate further euro appreciation and is quite unlikely to cut rates again.”
During the news conference, Mr. Draghi deflected persistent questioning about a deal that the Irish central bank announced Thursday. It said that the E.C.B. had agreed to stretch out repayments for the 2009 bailout of Anglo Irish Bank to 40 years, instead of the 10 years previously scheduled.
The Irish Parliament approved legislation early Thursday to liquidate Anglo Irish Bank, after negotiating with the E.C.B. to swap the so-called promissory notes used to bail out the Irish lender for long-term government bonds.
Mr. Draghi said the E.C.B.’s Governing Council merely “took note” of the Irish action. But he declined to provide any details.
He may have wanted to avoid any impression that the central bank was giving a financial break to the Irish government. The E.C.B.’s charter prohibits it from directly financing euro zone governments.
Mr. Draghi did, however, applaud efforts by the Irish government to restore growth and get government finances under control. “All in all the outlook is very positive,” he said.
He also strenuously defended himself against criticism that, in his previous job as governor of the Bank of Italy, he had not done enough to prevent problems at Monte dei Paschi di Siena, which has required a €3.9 billion bailout by the Italian government.
Mr. Draghi was governor of the Italian central bank, responsible for bank supervision, during the period when Monte dei Paschi was getting in trouble several years ago. The former Prime Minister of Italy, Silvio Berlusconi, with whom Mr. Draghi has tense relations, has tried to capitalize on the issue during the current Italian election campaign.
Mr. Draghi said the Bank of Italy had done all it could, and noted that it lacked the power to remove managers at Monte dei Paschi or to pursue criminal wrongdoing. “You should certainly discount much of what you hear and read as part of the regular noise that elections produce,” Mr. Draghi said.
Julia Werdigier and Mark Scott contributed reporting from London.
Article source: http://www.nytimes.com/2013/02/08/business/global/european-central-bank-leaves-interest-rate-unchanged.html?partner=rss&emc=rss
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