Does the ECB Have Too Much Impact on the Euro?

Recent remarks by the President of the European Central Bank (ECB), Christine Lagarde, suggested that the appreciation of the Euro (EUR) is putting downward pressure on prices, or in other words not helping achieving the central bank’s inflation targets.

Speaking to the Franco-German Parliamentary Assembly on Monday, Lagarde said that economic recovery in the Eurozone remains very uncertain, uneven, and incomplete, noting that uncertainty requires a very careful assessment of the incoming information, including developments in the exchange rate.

Meanwhile, recent research notes by Bundesbank suggested that the ECB is playing a large and growing role in influencing the Euro, through its accommodative policy and recent communication, Reuters reported.

This comes at a time in which the ECB might argue that it not controlling the European currency’s exchange rate, especially due to fears of being accused of currency manipulation, which is a main reason for disagreement between the world’s two largest economies, the United States and China.

However, according to Bundesbank, the ECB has an influence over the exchange rate ever since the global financial crisis more than a decade ago.

This, according to the German bank, has affected the exchange rate of the Euro, including against the US Dollar (USD).

A study by Bundesbank, picked up by Reuters, reportedly suggested that the ECB could weaken the Euro by 0.70% against the USD, Japanese yen (JPY), and the British Pound (GBP) by lowering the return on German five-year government bonds by just 10 basis points.

“This suggests that potential effects on the exchange rate should be taken into account when communicating monetary policy.”