ECB’s Villeroy says too weak euro threatens price stability

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PARIS, May 16 (Reuters) – The euro’s weakness on currency markets could threaten the European Central Bank’s efforts to steer inflation towards its target, ECB policymaker Francois Villeroy de Galhau said on Monday.

The euro on Thursday hit its lowest against the dollar since 2017. It traded slightly above that early on Monday. 

The euro’s weakness makes imported dollar-denominated goods and commodities – like oil – more expensive, fuelling price pressures that have already driven euro zone inflation to record levels.

“Let me stress this: we will carefully monitor developments in the effective exchange rate, as a significant driver of imported inflation,” Villeroy told a conference at the Bank of France, which he also heads.

“A euro that is too weak would go against our price stability objective.”

The U.S. Federal Reserve has tightened monetary policy more aggressively than its euro zone counterpart, though the ECB has signalled it is likely to join other major central banks in raising borrowing in July.

Villeroy said that a “decisive” ECB governing council meeting could be expected in June followed by an “active summer” on the monetary policy front.

“The pace of the further steps will take into account actual activity and inflation data with some optionality and gradualism,” he said.

Policymakers should “at least move towards the neutral rate”, he added, at which the central bank’s monetary stance is neither stimulating the economy nor holding it back.

The ECB’s deposit rate stands at -0.5%, meaning banks are charged for parking their idle cash at the central bank. It has been in negative territory since 2014.

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