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Draghi says a stronger euro would trigger looser policy ECB should mull action if inflation stays low: IMF nations

WASHINGTON, April 12, (RTRS): A further strengthening of the euro would require more loosening in the European Central Bank’s monetary policy to keep the current amount of monetary stimulus in place, ECB President Mario Draghi said on Saturday. Draghi made the strong comments as the issue of weak eurozone inflation took center stage at a meeting of the International Monetary Fund, whose steering committee urged the ECB to consider acting if low inflation becomes persistent. Draghi said that euro appreciation over the last year was an important factor in bringing inflation in the currency bloc down to its current low levels, accounting for as much as a half percentage point decline in the annual rate, which stood at only 0.5 percent year-on-year in March. The ECB aims to keep inflation close to 2 percent.

“I have always said that the exchange rate is not a policy target, but it is important for price stability and growth. And now, what has happened over the last few months is that is has become more and more important for price stability,” Draghi said at a news conference on the sidelines of the IMF and World Bank’s spring meetings. “So the strengthening of the exchange rate would require further monetary policy accommodation. If you want policy to remain as accommodative as now, a further strengthening of the exchange rate would require further stimulus,” he said.

Over the past 12 months, the euro has strengthened by nearly 5.5 percent against the dollar and by nearly 10 percent against the yen. In recent weeks it has reached levels against the dollar not seen since late 2011. On Friday it ended at just below $1.39. While the ECB does not formally target exchange rates, Draghi’s comments were the clearest signal yet that further strength in the euro could be a trigger for launching a stimulative asset purchase program known as quantitative easing. Last week, the ECB kept its interest rates steady but opened the door to possibly turning on its money-printing presses to boost the economy and keep inflation from staying too low. Draghi at that time said the central bank had achieved unanimity that QE asset purchases might be needed. The IMF’s steering committee, which represents all of the Fund’s 188 member nations, said the ECB “should consider further action if low inflation becomes persistent.”

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