European Central Bank council member Jens Weidmann said an appreciating euro alone won’t trigger a cut in interest rates and the exchange rate’s gains are justified by the economic outlook.
The strength of the euro “is one factor among many in determining future inflation rates” and “we will certainly not justify any monetary policy decision with one single factor,” Weidmann, who heads Germany’s Bundesbank, said in a Feb. 13 interview. “I believe that the exchange rate of the euro is broadly in line with fundamentals. You cannot really say that the euro is seriously overvalued.”
His comments come as central bankers and finance ministers from the Group of 20 nations meet in Moscow today amid speculation of a currency war. Looser monetary policy in the U.S. and Japan combined with mounting optimism in Europe drove the euro to 14-month and three-year highs against the dollar and the yen earlier this month. The currency has dropped two cents since ECB President Mario Draghi said on Feb. 7 that its appreciation poses a downside risk for inflation, signalling he may consider cutting rates.
“I don’t think that Mario Draghi was trying to talk the euro up or down,” Weidmann said, adding that the ECB “will abstain from manipulating or directly targeting the exchange rate.”
The euro jumped almost half a cent to $1.3394 before retreating to $1.3334 at 10:55 a.m. in Frankfurt.
Draghi said at a press conference in Moscow today that the exchange rate plays an important role in assessing the economic outlook and the ECB’s mandate is to pursue price stability “in both directions.” Asked if policy makers are considering a rate cut, Draghi said the ECB “never pre-commits” on monetary policy.
While the euro area’s recession deepened in the fourth quarter, there are signs the region is starting to recover. Economic confidence rose for a third month in January and investor sentiment has improved since September.
“If the appreciation of the exchange rate reflects a regained confidence in the euro area and an improved growth outlook, then this is fully in line with fundamentals,” said Weidmann, who opposes any further ECB action to fight the debt crisis and was the only council member to vote against the central bank’s bond-purchase program.
Weidmann suggested the ECB won’t significantly revise its economic forecasts next month. In December it predicted a 0.3 percent contraction this year followed by growth of 1.2 percent in 2014. Inflation was projected to average 1.6 percent this year and 1.4 percent next year.
“Our forecast, which I think is still in line with what we’ve seen so far, is one of a gradual recovery in the second half of this year, lagging the upswing of the world economy,” Weidmann said. “I have no reason to doubt this baseline” and confidence indicators serve “as a confirmation of our projections.”
He rebuffed calls from French President Francois Hollande for looser ECB policy and coordinated government action to depress the currency in order to spur growth.
“I fear a politicization of the exchange rate,” Weidmann said. “I saw indications of that in Japan but you could as well refer to recent statements by European politicians not too far from here.”
All members of the ECB’s Governing Council agree “that central banks cannot solve the euro-area crisis,” Weidmann said. “There is unanimous agreement that only structural reforms and fiscal consolidation” are the answer.
A slower pace of adjustment in euro member countries remains “one of the major risk factors” for the economic outlook, he said.
Weidmann, 44, left his job as German Chancellor Angela Merkel’s advisor to take the helm of the Bundesbank in May 2011. He stuck to his criticism of the ECB’s as-yet-untapped bond-buying plan, which has been tacitly supported by Merkel, saying the calm it has brought to financial markets was to be expected.
“The same effect on markets could have been achieved by the Eurogroup announcing euro bonds from tomorrow on,” he said. “The finance ministers would have had the political legitimation to do it, but they didn’t. So we’re back to the question of who is legitimized to do what and where are the limits of monetary policy.”
Weidmann said while he hopes the ECB won’t have to buy bonds, “the experience with similar announcements is that it is quite likely that someday you will be asked to show your hand.”
Weidmann’s predecessor Axel Weber resigned over ECB asset purchases, as did Germany’s previous representative on the ECB’s Executive Board, Juergen Stark. Weidmann dismissed repeated speculation that he might also step down over the ECB’s activism, which he says blurs the line between monetary and fiscal policy.
“I deliberately came to the Bundesbank in a difficult time, I know what there was to expect here,” he said. “I get a lot of pleasure from serving here at the top of the Bundesbank, it’s a very sensible task, and in that sense don’t believe the rumors you are hearing.”
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