European Central Bank President Mario Draghi said on Thursday that the recent appreciation in the euro is a sign of confidence in the currency.
Speaking at the post-decision press conference in Frankfurt, Draghi reiterated that the exchange rate is not a policy target, but is important for growth and price stability.
"Exchange rates should reflect fundamentals," the central bank chief said. The central bank will monitor the currency to determine any impact on inflation outlook, he added.
The better-than-expected repayment of 3-year loans, or LTROs, by banks "reflects the improvement in financial market confidence", Draghi said in his introductory statement.
"We will closely monitor conditions in the money market and their potential impact on the stance of monetary policy, which will remain accommodative with the full allotment mode of liquidity provision."
The central bank left interest rates unchanged for the seventh month in a row earlier on Thursday. The refi rate was kept at a record low 0.75 percent, in line with economists' expectations.
The bank expects inflationary pressures to remain contained and the underlying pace of monetary expansion is subdued, Draghi said. "Inflation expectations for the euro area remain firmly anchored," he said. "This allows our monetary policy stance to remain accommodative."
The ECB also expects the economic weakness in the euro area to prevail in the early part of 2013 due to the adverse impact of low consumer and investor sentiment on domestic expenditure, as well as subdued foreign demand.
The bank, however, sees a gradual recovery later in the year as domestic demand will be underpinned by accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation. Meanwhile, export growth is expected to benefit from a strengthening of global demand.
"Financial market sentiment has improved and the latest survey indicators confirm earlier evidence of a stabilization in business and consumer confidence, albeit at low levels," Draghi said. He urged governments to reduce further both fiscal and structural imbalances and to push ahead with financial sector restructuring.
"The risks surrounding the economic outlook for the euro area continue to be on the downside," he reiterated.
Regarding credit growth, Draghi said the subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk and the ongoing adjustment in the balance sheets of the financial and non-financial sectors. However, he pointed out that banks reported improvements across all funding categories in the fourth quarter.
by RTT Staff Writer
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