Persistent gains in the euro due to external factors can hurt the outlook for euro area inflation, while an economic improvement could offset the negative impact of a strong currency arising from expectations of tighter policy stance in future, European Central Bank Executive Board member Benoit Coeure said Monday.
"With policy being effective in boosting growth, any disinflationary effect of a stronger currency arising from expectations of a tighter future monetary policy stance might be mitigated, or offset, by the ensuing improvement in the economic outlook," Coeure said in a speech in Frankfurt.
"However, exogenous shocks to the exchange rate, if persistent, can lead to an unwarranted tightening of financial conditions with undesirable consequences for the inflation outlook."
Last Thursday, the ECB left its all three interest rates and its massive asset purchases unchanged as it acknowledged that the strengthening euro was a source of concern that led to the downgrade to euro area inflation outlook.
The euro soared as ECB President Mario Draghi hinted at the possibility of stimulus decisions in October.
"The recent volatility in the exchange rate represents a source of uncertainty which requires monitoring," Coeure said.
Citing the ECB's current assessment, he said policy will remain more accommodative for longer and thus likely mute further the pass-through of any growth-driven exchange rate appreciation.
by RTT Staff Writer
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