The Government will welcome the European Central Bank's intervention to bolster the euro yesterday. The currency's continuing decline has been a major contributor to inflation and any move to shore it up should help take some of the pressure off further price rises. It would also help the Government to resist union demands for pay increases or some form of compensation to help offset Ireland's high inflation rate. Yesterday's intervention, however, could also lead to a further interest rate rise within weeks, spelling bad news for mortgage holders. The ECB last raised rates in a follow-up move to support its previous, and first, intervention to prop up the euro in late September. The Minister for Finance, Mr McCreevy, will discuss exchange rate policy when he meets his euro-zone counterparts at the Ecofin meeting in Brussels on Monday. The meeting will also be attended by ECB president Mr Wim Duisenberg and his deputy Mr Christian Noyer.
The ministers may also discuss the possibility of getting support from the other major international central banks. The absence of such support yesterday meant the ECB's currency buying spree had little impact. The euro closed at $0.8644 yesterday, up from $0.8603 on Thursday having rallied as high as $0.8796 immediately after the first round of intervention. But focus on the lone nature of the intervention, combined figures from the US suggesting that earnings are still quite strong, meant it fell back to $0.8577. This forced the ECB into another round of supportive intervention later in the day.
The euro remains below the level it reached following the last bout of intervention on September 22nd. The ECB and many finance ministers are concerned that the euro's 26 per cent decline against the dollar since its introduction at the beginning of 1999 has boosted the price of imports to the euro zone, especially of dollar-denominated oil.
It has also eroded the spending power abroad of EU citizens and has prompted the ECB to raise interest rates seven times in the past year.
Mr Duisenberg said at a press conference earlier this week that policy-makers had underestimated the effect of the euro's decline and rising oil prices on inflation. Oil prices are now almost four times what they were at the euro's inception - euro zone inflation reached a six-year high of 2.8 per cent in September, while Irish inflation is running at 6.2 per cent.
The ECB said its action was spurred by concern about the global and domestic repercussions of the euro's exchange rate, including its effect on price stability. It repeated that the external value of the euro did not reflect the favourable conditions of the euro area.
According to Mr Derek Keogh of Anglo Irish Bank, the euro will continue its downward trend until the Federal Reserve, and possibly the Bank of England, intervene simultaneously. Recent comments that the G7 believed the euro was undervalued were not consistent with unilateral intervention, he said. "We can expect exchange rate volatility to increase in the coming weeks as further intervention, while largely ineffective, remains a threat."
