ECB President Mario Draghi and Bundesbank President Jens Weidmann. Photo: Mehmet Kaman/Anadolu Agency via AFP

Leading German-language business newspaper Handelsblatt reported this morning there is growing apprehension among ECB policy makers regarding the rising euro:

According to three insiders, the revaluation of the euro during the last few months has been a growing headache for the European Central Bank (ECB). They say that this might lead to hesitation about choking off bond purchases, and the so-called “tapering” might proceed more slowly than previously thought.

“The euro’s price reaction shows how receptive the market is for such news,” said Helaba analyst Viola Julien. Investors at the Bankers’ Summit in Jackson Hole waited in vain for monetary policy signals from the ECB boss Mario Draghi. “At the next Council meeting on 7 September, Draghi must deliver.”

But the paper also writes, the current inflation figures for the euro area, lend ammunition to the leading hawk on the bank, Jens Weidmann:

Next Thursday, the central bank is coming to the big showdown. Draghi, Bundesbank President Jens Weidmann and his colleagues from the Governing Council then decide on the further course of monetary policy. Many analysts are expecting a signal for an early expiry of the billion-dollar bond purchases of the central bank. Weidmann has already clearly positioned himself: he sees no need to continue the massive bond purchases in 2018. But the decision whether or not to actually downsize bond purchases next year has been put off for a long time. Many council members are worried about the effect on the euro.

The current inflation figures for the euro area, however, lend Weidmann and other advocates a little wind. Consumer prices in the euro area rose by 1.5% in August compared with the previous month, according to a preliminary estimate by Eurostat. In July, the increase was only 1.3%. The medium-term inflation target of the ECB is around two percent.

Price history: Inflation rises before crucial ECB meeting

The rate of inflation rose in August in Germany. An increase is also expected for the euro area as a whole. Before the decisive ECB meeting next week, this provides arguments for a change of course.

To achieve this, the bank has been buying bonds from the euro area countries since March 2015. Therefore price development plays a decisive role in the question about the future of the billion-strong bond purchases. The central bank has announced a discussion about this for autumn. Many experts expect the ECB to gradually reduce purchases from January 2018.

However, at the July meeting of the central bank some members of the council had already warned about a rise in the euro. Since the beginning of the year, the euro has already gained more than 13% relative to the dollar. A higher exchange rate has a similar effect to a monetary policy tightening: it makes the goods of local companies more expensive on the world market, thereby worsening their competitiveness, while making imports cheaper and thus pushing inflation in the euro area.

Economists still do not see any reason for panic and lead the rise largely to fundamental reasons, such as the lower political uncertainty in the euro area. However, as the rapid development of the exchange rate continues, companies are becoming more and more difficult to adapt in the short term.

Inflation in the euro area: Cheap vegetables, expensive flights

Telecommunications

The largest decline in inflation is recorded in services around the telephone and the Internet. Prices fell by two percent compared to the previous year.

Fruit

Consumers are paying 1.7 percent less compared to the previous year for fruit.

Vegetables

Good news for fans of healthy food: also vegetables have become cheaper. Compared to the previous month, the average price fell by 1.4 percent.

Holidays will be more expensive

The short trip to Mallorca, on the other hand, makes people in the Euroraum always more expensive. The prices for package trips are up by a great 4.5 per cent.

Hotel industry

You also have to pay for the hotel trade: The price for accommodation and accommodation this year is five percent higher.

Air transport services

The apex of inflation gains lead to airline services. The prices rose by 5.8 percent.

Monetary policy change can lead to stronger movements on the foreign exchange market because exchange rates react less to actual conditions than to a changing monetary policy. If capital market interest rates rise in the euro area, it will be attractive for investors.

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