ECB holds rates as stronger euro threatens economic recovery

Important Element

While Draghi’s predecessor, Jean-Claude Trichet, was willing to intervene verbally to influence the euro, speaking of “brutal” shifts in currencies, Draghi has been circumspect so far.

“I never comment on exchange rates,” he said on Jan. 10, while acknowledging that currencies are “certainly a very important element as far as growth and price stability are concerned.”

The ECB estimates the euro-area economy will shrink 0.3% this year before posting growth of 1.2% in 2014. Draghi spurred hopes of an economic recovery later this year when he spoke of “positive contagion” on financial markets in January.

He may paint a less upbeat picture today.

“We expect the tone of the statement to turn more cautious on the economic outlook and more relaxed on the outlook for inflation, reflecting the recent increase in some money-market rates and the appreciation of the euro,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London.

Loan Repayment

The Euro Overnight Index Average, or EONIA, climbed to 0.08% from 0.06% after banks handed back more of the ECB’s three-year loans than economists forecast at the first early-repayment opportunity last month.

As a result of the repayments, the ECB’s balance sheet shrank to an 11-month low of 2.77 trillion euros ($3.76 trillion) last week from a record-high of 3.1 trillion euros at the end of June.

That contrasts with the Fed’s growing balance sheet, which rose above $3 trillion for the first time in January after Chairman Ben S. Bernanke committed to open-ended purchases of Treasuries and mortgage-backed securities to combat unemployment. The Bank of Japan is also expanding its stimulus to fight deflation.

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