The European Central Bank is closely monitoring the euro exchange rate as it prepares to announce plans to scale down its large monetary stimulus "later this year," ECB President Mario Draghi said on Monday.
The comments, at the European Union parliament in Brussels, underline the ECB's caution as it approaches its biggest policy decision in years.
Mr. Draghi said the ECB is increasingly confident it will meet its inflation target and is preparing to "recalibrate" its monetary policy, which includes a EUR60 billion ($71.5 billion) a month bond-buying program.
The ECB chief has previously indicated that the bank will probably announce the future of its bond-buying program, known as quantitative easing, in late October. The program is currently due to run at least through December.
But policy makers are still waiting for signs that the economic recovery is translating into stronger inflation, Mr. Draghi d. The ECB aims to keep inflation just below 2%, but has missed that target for years.
"We still see some uncertainties with respect to the medium-term inflation outlook," Mr. Draghi said. "Most notably, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring."
The euro has risen sharply against the dollar in recent months amid a broadening economic recovery in the 19-nation euro area and signals from ECB policy makers that they are preparing to tighten monetary policy.
The ECB needs "to be patient and persistent," Mr. Draghi said.
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European Central Bank President Mario Draghi clashed on Monday with a former leader of Germany's ascendant far-right party over the bank's easy-money policies, underlining the frustrations that helped to propel the party this weekend into the German parliament.
At a European Parliament hearing in Brussels, Mr. Draghi was pressed repeatedly by Bernd Lucke, a European lawmaker and former official in the nationalist Alternative for Germany party, over whether there was an ultimate limit to the size of the ECB's bond-buying program, known as quantitative easing.
Mr. Lucke left the AfD two years ago after losing a leadership contest, and now represents the Liberal Conservative Reformers.
Mr. Draghi refused to directly answer the question, and criticized Mr. Lucke for seeking headlines. "You keep on saying things because you want me to say certain things [for the] newspapers," Mr. Draghi said.
The dispute comes a day after the AfD party rocked Germany's political establishment by winning dozens of seats in the national parliament. The AfD's success, at the expense of Germany's main centrist parties, creates a period of political uncertainty in the eurozone's largest economy as Chancellor Angela Merkel seeks to form a new government. That could complicate the ECB's plans to phase out its easy-money polices.
While Mr. Draghi didn't comment directly on the German election result, he did suggest that political risks could pose a threat to the region's recovery. He also struck a cautious note on the euro currency, which has soared against the dollar in recent months as the eurozone economy strengthened and investors anticipated a policy shift from the ECB.
"As you've seen today, the exchange rate does reflect in some extent political changes in the eurozone," Mr. Draghi said.
The euro has fallen almost 1 cent since Friday to $1.1869. That partly reflects investors' concerns about the difficulties of forming a new German government that would include the free-market FDP party and the environmentally focused Greens.
The FDP is skeptical of eurozone political changes that many economists consider vital to securing the bloc's long-term future, including the creation of a sizable common budget.
Still, Mr. Draghi was generally bullish about the eurozone's economic recovery, which he described as "firm and broad-based," and driven largely by domestic forces. That, he suggested, makes the region more resilient to economic turbulence beyond its borders, notably a possible downturn in China.
Mr. Draghi's comments suggest the ECB is still on track to scale down its EUR60 billion-a-month ($71 billion) QE program, which is due to run through December. Policy makers have indicated they want to decrease the level of stimulus as the eurozone economy accelerates, though they are wary of upsetting the long-awaited recovery.
Mr. Draghi reiterated that message on Monday, saying the bank would probably unveil its plans for QE after a policy meeting on Oct. 26. But he stressed that policy makers would be patient and prudent.
"As we see every day by new events, surprises are so large," Mr. Draghi said. "We've got to be sensitive to the danger of not halting the recovery through hasty monetary-policy decision-making."
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(END) Dow Jones Newswires
September 25, 2017 14:28 ET (18:28 GMT)