The European Central Bank ready to fight deflation keeps close eye on euro. Further strengthening of the euro will prompt ECB to launch a fresh wave of stimulus in order to maintain its loose policy stance and fight low inflation, its president has said.
Mario Draghi said the single currency, which has appreciated by 14pc against the dollar since July 2012, had helped to push euro zone inflation down to a record low of 0.5pc in March.
Mr Draghi added that any further strengthening would warrant further action by the ECB, including non-standard measures such as quantitative easing.
Over the past few months [the exchange rate] has become more and more important for price stability, Mr Draghi said at the International Monetary Fund (IMF) spring meeting on Saturday.
'We are aware it's not the only element, but it has been an important element.
So in a sense if you want monetary policy to remain as accommodative as it is today,
a further strengthening of the exchange rate would require further monetary policy stimulus.'
Mario Draghi said last month that the strength of the euro had undermined the ECB's attempts to stabilize the single currency bloc.
He emphasized on Saturday that the euro exchange rate was not a policy target and declined to state a specific level that would trigger further stimulus.
However, Mr Draghi said the strength of the single currency had reduced euro zone inflation by between 0.4 and 0.5 percentage points. Inflation has dropped from 2.7pc in the first quarter of 2012 to a current level of just 0.5pc.
Lower food and energy prices were also major factors keeping inflation low, Mr Draghi said. However, he added that the threat of deflation - or falling prices - was not imminent.
Deflation can pose a danger to economies because if prices are falling people put off spending in anticipation of further falls. It also makes it harder for governments and businesses to reduce debt burdens.
Mr Draghi also said the ECB's forward guidance policy had helped to reduce volatility in the euro zone. However, he said further tightening of US monetary policy could pose risks to the global economy.
'All central banks are aware of the spillovers that their decisions could create for other countries,' he said.
Draghi added that countries with fragile economies were more likely to suffer from further volatility.
'Spillovers might have an incidence upon countries inherently fragile because of their economic policy, or lack of it, and that's been the experience of the last year,' Draghi said.