ECB holds rates as stronger euro threatens economic recovery

‘Currency War’

“A significant shift is underway in global central banking,” said Paul Mortimer-Lee, global head of market economics at BNP Paribas SA in London. “There is a worldwide currency war and the ECB seems to be a central bank that is not targeting the real economy as much as the Fed, the Bank of Japan and the Bank of England,” he said. The ECB “risks being the loser.”

A 10% appreciation against a basket of trading partners reduces euro-area gross domestic product by 0.5 percentage point in the first year, according to Elga Bartsch, chief European economist at Morgan Stanley & Co. in London.

The euro’s strength may force the ECB to revise down its economic projections in March, “reopening the door for another rate cut,” said Carsten Brzeski, an economist at ING Group in Brussels. Twelve of 42 economists in another Bloomberg survey forecast an ECB rate reduction in the second quarter.

Still, euro-area economic confidence is at a seven-month high and Germany, the region’s largest economy, is showing signs of recovery.

“The ECB is in a difficult position,” Brzeski said. “A rate cut now would probably do little to reverse the current trend of the exchange rate. Draghi will have to use verbal intervention to limit any further appreciation of the euro without committing the ECB to possible future policy action.”

Bloomberg News

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