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MNI INTERVIEW2: ECB To Respond If Euro Saps Prices-De Guindos

(MNI) LONDON

The European Central Bank would respond if euro strength undermines attempts to hit its price stability target, its Vice President Luis de Guindos told MNI, but he reiterated that targeting exchange rates via monetary policy would trigger a currency war.

"If any concrete situation or variable jeopardises our inflation objective, for sure we will react. That's common sense, and it's part of our reaction function," De Guindos said in a video interview. "When we make our projections about inflation we take into consideration the exchange rate and its evolution. It is included in our models, and so indirectly it has an impact on inflation.

"It's not a policy target, but we do not overlook it, either," he said.

But he stressed: "if you look at the communiques of the G20, there is always a reference to the fact that economic policies in general, and not only monetary policies, should not target the exchange rate as this would lead to a currency war."

Asked whether recent Federal Reserve policy including the move to average inflation targeting could produce structural dollar weakness, De Guindos said he did not think so.

OVERREACTING FX MARKET

"You have to bear in mind that if there is a market that has overreactions, it's the foreign exchange market," he said, noting that much of the euro appreciation occurred after the approval of the European Union's Covid recovery fund.

"The problem now is that growth is very low, and simultaneously there are some trade tensions," De Guindos said. "At the global level, the biggest mistake we could make would be to transform the trade disputes into a form of currency dispute. That would be suicidal and would repeat the mistakes of the Great Depression."

The ECB does not have preferences for particular euro exchange rate levels, he said.

"We do not have any concrete level at all. We take into consideration its evolution, and it is included in our models, but we do not have a red line. It's much more a question of the trajectory of the variable," he said.

His remarks came after Banca d'Italia Governor Ignazio Visco described the euro's recent strengthening as "worrying," with "obvious" monetary policy implications at a time when inflation is already low.

MNI Frankfurt Bureau | +49-69-720-146 | luke.heighton@marketnews.com
MNI Frankfurt Bureau | +49-69-720-146 | luke.heighton@marketnews.com

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