ECB’s Coeure Warns on Inflation Impact of Currency

European Central Bank Executive Board member Benoit Coeure said “exogenous shocks to the exchange rate, if persistent, can lead to an unwarranted tightening of financial conditions with undesirable consequences for the inflation outlook”, thus adding to the indications from last week’s council meeting, that the strong currency is making the ECB reluctant to commit to an end date for quantitative easing.

Indeed, Coeure stressed that monetary policy is likely to offset the FX downward pressure on on inflation. He said the strength in the single currency can partly be explained by “improved, euro area growth prospects”, a “tightening in the relative monetary policy stance vis-a-vis the U.S.” and an exogenous component.

Coeure added, however, that the exchange rate “pass through is likely to have been lower in recent years” and that “the current solid economic expansion in the euro area allows firms that export to the euro area to increase prices in their currency without losing market share, thereby mitigating, once again the pass through”.

At the same time, he stressed that “monetary policy is far from being ineffective in stimulating aggregate demand, also when approaching the effective lower bound. The fact that inflation remains subdued rather reflects constraints operating at the stage of transmission – from activity to prices – that are often outside the control of monetary policy”.

By Caroline Williams