The Strength of the Euro Puts the European Central Bank to a Tough Test... Will It Signal a Rate Cut?

The European Central Bank is closely monitoring the ongoing rise in the value of the euro on the inflation trajectory, amid increasing market questions about whether the strength of the currency might lead to a rate cut in the upcoming phase.

Kocher: Rate Cut Is an Option

Austria's central bank governor and member of the ECB Governing Council, Martin Kocher, stated that the bank may have to consider a new rate cut if further increases in the euro's exchange rate negatively impact inflation expectations.

Kocher explained in an interview with the Financial Times that the current gains of the euro against the dollar are still "limited" and do not warrant an immediate reaction, but emphasized that all options remain open if the currency continues to rise.

The Exchange Rate Is Not the Goal

Kocher confirmed that any potential move in monetary policy would not be due to the exchange rate itself, but rather due to its direct impact on inflation, stating:
"If the euro continues to rise more and more, it may at some point become a reason for action, not because of the exchange rate, but because it translates into a decrease in inflation."

International Tensions Pressure the Dollar

Policymakers are monitoring the performance of the US dollar, which continues to decline against the euro and other currencies, amid political and trade tensions between the United States and the European Union, related to the Greenland issue.
Investors have also turned to diversify their investments away from US assets due to risks associated with the policies of US President Donald Trump.

The Euro at Its Highest Level in 4 Years

Speculation about a potential joint move between the US and Japan to support the yen has deepened the dollar's losses, with the euro rising to $1.199 on Tuesday, marking its highest level in over four years.

Direct Impact on Import Prices

Kocher indicated that the continued strength of the euro could lead to lower import prices, noting that the Chinese currency is "structurally undervalued" compared to the euro.
He added that the rise of the single currency could weaken European competitiveness compared to the US economy.

No Specific Level Raises Concerns

Despite previous warnings that exceeding the euro level of $1.20 could become "complicated," Kocher refused to specify a particular number that concerns him, emphasizing that the primary goal is inflation, not the exchange rate.

Uncertainty Due to Tariffs and Tensions

Kocher pointed out that the recent US retreat from imposing tariffs on Europe does not eliminate the risks of trade tensions, warning that these risks may persist in the foreseeable future, complicating the provision of decisive assessments regarding monetary policy.

Cautious Optimism for Eurozone Growth

Despite fluctuations in global trade, Kocher stated that the Eurozone economy has shown better resilience than expected, expressing cautious optimism about growth during the current year.

Interest Rate Stability in February

Kocher confirmed that he currently sees no need to change interest rates ahead of the ECB meeting scheduled for next February, where a rate hold at 2% is widely expected for the fifth consecutive time.

Flexibility Is a Priority for the Next Phase

Kocher concluded by saying that maintaining full flexibility in monetary policy is the most logical option amid the uncertainty surrounding the global economy.