ECB’s de Guindos: Would Be Suicidal to Get into Exchange Rate Dispute

20 September 2020

By David Barwick – FRANKFURT (EconoStream) – It would be ‘suicidal’ for global monetary authorities to engage in a currency war, European Central Bank Vice President Luis de Guindos said Sunday.

In an interview with Spanish daily La Razón, de Guindos stressed the mechanical nature of the exchange rate’s importance for the ECB, via inflation expectations.

Asked if he saw a currency war looming, de Guindos conceded the existence of ‘tensions around trade and low economic growth’, but warned that ‘it would be suicidal to enter into any sort of dispute about exchange rates.’

The ECB does not target the exchange rate ‘because that is not our mandate’, he said, but rather takes into account its impact on medium-term inflation expectations. In doing so, he said, ‘our ultimate objective … is not to influence the exchange rate.’

Still, he added: ‘It is an important variable, as the appreciation of the euro has an impact on our inflation projections, and these projections influence our monetary policy.’

De Guindos called for ‘a significant rebound in activity in Europe in the third quarter, just like what happened in May and June.’ In Spain, whose Minister of Economy he was previously, ‘the recovery should be stronger, because the fall was also more severe’, he said.

Policy intervention to arrest the economic deterioration associated with Covid-19 was ‘unavoidable, and both the fiscal and monetary stimulus should continue for as long as we feel the effects of the pandemic’, he said.

Asked whether the ECB’s pandemic emergency purchase programme (PEPP) could acquire permanency, de Guindos called it ‘a temporary emergency programme which is serving its purpose.’ Pressed, he said that ‘[f]or now, the PEPP will run until the middle of next year.’

Much of the PEPP’s total volume of €1.35 trillion remains unused, he noted, ‘and there is still room for manoeuvre.’ While the ECB is prepared to calibrate any of its instruments according to the situation, ‘[f]or the moment’ PEPP is working well in every respect, including its contribution to restoring price stability, he said.

De Guindos dismissed the suggestion that higher inflation needed to be a concern, rejoining that ‘the risk is inflation being very low, not very high.’ Although value chains in a post-pandemic world could theoretically be less efficient and thus lead to faster price growth, the ECB’s staff projections consider this possibility, he said, ‘and even then inflation is projected to reach 1.3% in 2022, which is clearly below the ECB’s definition of price stability.’