Euro’s strength is a concern, says ECB policymaker

Exchange rate volatility generates further downward pressures on prices at a time when inflation is already low

Bank of England's investigation into whether negative rates might help the British economy through its current downturn has found “encouraging” evidence.  Picture: Stefan Rousseau/PA Wire

A recent strengthening in the euro’s exchange rate is a worry and will warrant a reaction from the ECB if it drags inflation farther away from its goal, ECB policymaker Ignazio Visco said. Mr Visco also denied ECB policymakers were divided on the matter and said his views echoed those of the executive board. 

“The euro’s recent strengthening is worrying us because it generates further downward pressures on prices at a time when inflation is already low,” Mr Visco, Italy’s central bank governor, told an event in Trento. 

The monetary policy implications are obvious: if the downward pressures jeopardise our price stability objective, we’ll have to intervene. 

“If, however, opposite effects were to emerge, the measures we’ve already taken could suffice.”

The euro hit its highest level since mid-2018 on September 1 at $1.2011, but has since given up half of its gains for the year, closing at $1.1630 last week amid a new surge in coronavirus cases in Europe.

Bank of England's Tenreyro: Evidence on negative rates 'encouraging'

The Bank of England’s investigation into whether negative rates might help the British economy through its current downturn has found “encouraging” evidence, policymaker Silvana Tenreyro said in an interview. Mr Tenreyro told the Sunday Telegraph that she did not expect Britain to continue to enjoy a fast V-shaped recovery, due to headwinds from local flare-ups in Covid-19, rising unemployment and a “very weak” global economic outlook. Britain’s central bank said in August that it was taking a closer look at the case for cutting interest rates below zero. 

“The evidence has been encouraging,” she said, adding that cuts in interest rates below zero had been almost fully reflected in reductions in interest rates charged to borrowers. “Banks adapted well — their profitability increased with negative rates largely because impairments and loss provisions have decreased with the boost to activity and the increase in asset prices,” she said. 

Ms Tenreyro said she expected Britain’s rebound from the historic 20% slump in output during the lockdown in the second quarter looked set to lose pace as Covid-19 cases rose again. She said that it was too early to judge if scaled-back job support plans announced by finance minister Rishi Sunak last week would have a big impact in staving off a rise in unemployment, especially in hard-hit sectors such as high-street retail and hospitality. 

“Another factor interrupting the V is a very weak global outlook, with high uncertainties, particularly with a second wave already striking many countries,” she said.