ECB's Weidmann: 'Shortsighted' to Focus on Euro Strength

19/5/2014

Setting Specific Target for Euro Exchange Rate Could Conflict With ECB Mandate, Bundesbank Chief Says

Monetary-policy efforts targeted solely toward the euro exchange rate would be "shortsighted," a top European Central Bank official said Monday.

ECB officials have made clear they are concerned about the high value of the euro, which weakens inflation. But Jens Weidmann, a member of the ECB's governing council, warned that "it would be shortsighted to only take one side of the exchange rate into view."

Speaking at a Deutsche Bundesbank conference here, the president of Germany's central bank noted that the growing strength of the euro is probably the result of rising international investment in the euro zone.

Amid a public debate in the currency bloc about the euro's rise, Mr. Weidmann said the exchange rate wasn't a target of common monetary policy, but added that it is relevant, because it can have an impact on inflation. That said, setting a specific target for the euro exchange rate could conflict with the ECB's mandate to maintain price stability in the euro zone, he said.

"In order to strengthen growth and employment in the euro area permanently, member states must ensure competitive economic structures" instead of relying on the euro exchange rate, Mr. Weidmann said.

With annual inflation in the 18-nation euro zone at 0.7%, well below the European Central Bank's target of just under 2% over the medium term, pressure is building on the ECB to consider additional stimulus measures.

Weak inflation makes an economy more vulnerable to shocks that could cause consumer prices to fall, known as deflation, which in turn hampers corporate profits and consumer spending and makes it difficult to service debts.

Last week, the ECB's top economist, Peter Praet, in an interview with German newspaper Die Zeit, said the central bank is preparing a number of measures to counter low inflation, mentioning a negative rate on deposits as a possible option in combination with other measures. A negative deposit rate would be likely to cheapen the euro by making international investors cast a more wary eye on assets denominated in the currency.

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