Growing unease at ECB over euro strength


  • Business
  • Wednesday, 31 Dec 2003

 

FRANKFURT: The European Central Bank (ECB) is growing increasingly uneasy that the strength of the euro could undermine recovery and require an interest rate cut in the next few months, a senior ECB official has been quoted as saying.  

The German government remained calm as the euro pushed through US$1.25 against the greenback to a new record high on Monday, breaking levels that business groups say would hurt exports which are the driver behind a tentative rebound in the 12-nation bloc. 

But the speed of the euro’s rise – up 14% since September – is proving unsettling for the ECB, where a range of options for tackling the currency surge are under discussion. 

“The rapid rise of the euro brings an element of uncertainty into our forecasts,” the Financial Times quoted a senior ECB official as saying. We have warned for some time about the risks to growth posed by economic imbalances in other regions (the US budget and current account deficits). Those risks are now materialising,” the official said. 

He said the euro’s performance over the next “four to eight weeks” could influence the outlook on interest rates, although he stressed that the ECB must analyse the whole picture of the currency’s impact on both growth and inflation. 

These remarks appear to indicate that discussions about cutting ECB rates, now at 2% and a full percentage point above those for the US Federal Reserve, will be on the table.  

The ECB has three main options to restore calm to currency markets: cut rates to offset monetary tightening and reduce the allure of euro versus US assets; sell euros in the foreign exchange markets to cap its rise; and coordinated policy assault by major industrialised nations to change market dynamics. 

Until now, the ECB has only waved the intervention flag with its president Jean-Claude Trichet and chief economist Otmar Issing issuing reminders that it always is an option. – Reuters  


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