MNI ECB UPDATE: Coeure Underlines Mostly Relaxed Stance on EUR

By Jack Duffy

     PARIS (MNI) - Executive Board member Benoit Coeure added his voice Monday

to other European Central Bank comments suggesting the central bank does not

believe the rising euro has reached the "pain threshold" that should cause it to

be seriously concerned about its growth and inflation outlook.

     Coeure, speaking at a conference in Frankfurt, said the impact of a

currency's rise depended partly on the state of the economy and that stronger

Eurozone growth, backed by monetary stimulus, would dampen the pass-through

impact of the euro's 14% rise versus the dollar this year.  

     "The positive confidence and stimulus effects of monetary policy are likely

to offset, at least in part, the disinflationary effects of a stronger

currency," Coeure said.

     Coeure's comments were in line with those of ECB President Mario Draghi,

who told journalists last Thursday that while the euro's "volatility" was a

problem to be monitored, "the broad, robust, solid recovery" would eventually

result in higher inflation. 

     The comments also chimed with other ECB policymakers from Ardo Hansson of

Estonia to Ewald Nowotny of Austria, both of whom said recently that the euro's

rise simply reflected the better performing Eurozone economy and should not be

over dramatized. 

     The ECB last week upgraded its growth forecast for this year to 2.2%, while

leaving estimates for 2018 and 2019 unchanged. It also made much smaller

downward revisions in its inflation forecasts than the rise in the euro might

have suggested. It trimmed the 2018 forecast to 1.2% from 1.3% and the 2019

estimate to 1.5% from 1.6%.

     Coeure said that with inflation to remain subdued, the ECB's medium-term

horizon had lengthened, meaning that monetary policy would remain accommodative

for longer, further helping to neutralize the currency impact.  

     "And with the current recovery in the euro area being largely driven by

domestic demand, euro strength may also have less of an impact on growth than,

for example, after the Great Financial Crisis," he added.

     To be sure, the ECB is not at ease with the speed of the euro's rise.

Draghi said Thursday there was "broad" concern in the Governing Council over the

euro in last week's meeting. While that concern may cause the ECB to embark on a

slow tapering of its E2.3 trillion QE program, it's not enough to derail the

process, however.

     The market consensus still calls for QE bond purchases to be scaled back to

E40 billion a month from E60 billion as early as January, with details of the

plan to be announced following its Oct 26 and Dec 14 council meetings.  

     Coeure warned that exchange rate shocks, if persistent, could lead to an

unwarranted tightening of financing conditions and he repeated Draghi's

statement that the rising euro required "monitoring." 

     But in terms of its level of worry, "monitoring" remains well down the

scale from the "strong vigilance" or "heightened alertness" that the ECB has

used in the past to indicate real concern. 

--MNI Paris Bureau; tel: +33 1-42-71-55-41; email: jack.duffy@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$X$$$,M$$EC$]