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Carney rates hint gives Draghi helping hand on euro

The European Central Bank’s attempt to rid the eurozone of the threat of deflation became a little easier on Thursday evening, after Mark Carney warned Britain’s households and businesses to prepare for a rate rise by the Bank of England.

Sister title FastFT reports the euro fell below 80p to its lowest level in 19 months in morning trading following the BoE governor’s hint at a dinner in the City of London that the Monetary Policy Committee could raise borrowing costs from their current 300-year low of 0.5 per cent earlier than markets had expected.

A weaker euro helps policy makers in Frankfurt because it makes imports into the currency bloc more expensive, raising inflation closer to their target, writes Claire Jones in Frankfurt.

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Mario Draghi, ECB president, has said repeatedly that the single currency’s strength is one of the most important factors driving disinflation, which has left inflation at 0.5 per cent – little more than a quarter of the central bank’s target of below but close to 2 per cent. Almost 10 per cent of the eurozone’s imports come from the UK.

The governing council last week unveiled a package of exceptional measures, including negative interest rates and an offer of up to €400bn in cheap loans, to tackle the weakness in inflation and stagnant economic growth.

The ECB also strengthened its forward guidance to markets and the public that it will keep interest rates low for an extended period, unveiling policies that imply rate rises will remain on hold at least until the autumn of 2016.

And while the BoE and the US Federal Reserve are readying their exit from extraordinarily loose monetary policies, the ECB signalled last Thursday that it could do more should inflation remain subdued.

The most likely next option would be large-scale bond purchases, known as quantitative easing. Such a policy would almost certainly weaken the euro.

However, the governing council’s hawks believe buying assets such as sovereign debt could contravene the ECB’s mandate, which prohibits the financing of governments.

At the same time as Mr Carney made his Mansion House address, Jens Weidmann, Bundesbank president, said in Dubrovnik that such asset purchases were a “sweet poison” that postponed a “rude awakening” for governments that needed to reform their economies.

If the single currency continues to fall against the dollar and sterling, then the case for further ECB action would weaken.