Lagarde Says Euro Gains Have Blunted Stimulus Boost to Inflation

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President Christine Lagarde said the recent appreciation of the euro has partly offset the positive impact that the European Central Bank’s stimulus had in boosting inflation and reiterated that policy makers stand ready to adjust all of their instruments if needed.

The Governing Council will carefully assess all the information coming from the euro-area economy, including developments in the exchange rate, with regard to their impact on the medium-term inflation outlook, she said on Sunday.

“When it comes to meeting our price stability goal, there is and there will be no complacency,” Lagarde argued in herremarks at the meeting of the Council of Governors of the Arab Central Banks and Monetary Authorities. “Monetary policy will continue to play its role in the euro area with full commitment to its mandate.”

Her comments show the predicament that the ECB is facing with the euro’s recent rise to the strongest level in more than two years. Lagarde’s cautious remarks on Thursday failed to stop the currency’s gain. Chief Economist Philip Lane sought to toughen the tone on Friday, warning that the appreciation this year has dampened the inflation outlook.

Finnish governor Olli Rehn followed up onSaturday, arguing that underlying price pressures in the euro area have stabilized at a low level that isn’t in line with the ECB’s goal. Vice President Luis de Guindos called the exchange rate “one of the most important variables” in terms of macroeconomic performance and said the institution is monitoring it closely.

Delicate Balance

With their flurry of comments, ECB policy makers are attempting to strike a delicate balance between voicing concerns about the currency’s surge and avoiding any impression that they’re deliberately trying to weaken the currency.

Lagarde said on Sunday that euro-area economic recovery has been strong, but also uneven, uncertain and incomplete. The challenging economic environment continues to weigh on underlying price pressures, she added.

Despite the ECB’s stimulus measures, such as its 1.35 trillion euro ($1.6 trillion) emergency purchase program, “other factors, such as the appreciation of the euro have partly offset the positive pull coming from our measures,” Lagarde said. “Near-term price pressures will also remain subdued due to the recent appreciation of the euro exchange rate.”

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