ECB shrugs off euro worries

8 January 2003

FRANKFURT – The European Central Bank said Thursday said that economic recovery in the 12-member eurozone remained on course, insisting that the soaring euro would not harm the currency bloc’s export growth.

Speaking at a press conference after the ECB 18-head rate-setting council left its benchmark refinancing rate at an historic low of two per cent, bank chief Jean-Claude Trichet said that the pickup in the world economy should outweigh the adverse impact on eurozone exports of the strong euro.

“Although recent exchange rate developments are likely to have some dampening effects on exports,” Trichet said, “export growth should continue to benefit from the dynamic expansion of the world economy.”

Overall, euro area exports should continue therefore continue to grow, said Trichet said, who saw economic growth continuing to strengthen during the course of 2004 and inflation falling in the coming months as the strong euro helped to contain price pressures. Inflation dipped to 2.1 percent in December.

But in waving off worries expressed by European business and political leaders about the risks posed to the eurozone’s reovery by the euro’s strength, Trichet said that the exchange rate was only one of many factors that the back took into account when reaching any decision on interest rates.

In comments coinciding with the ECB meeting, German Economics and Labor Minister Wolfgang Clement said the euro represented a special risk adding that the exchange rate was a problem for Europe’s economic development.

That said, however, Trichet said the bank did not want to see excessive volatility or turbulence in the foreign exchange market, saying: “We have a stake in financial stability, in stability in general.”

The euro has surged by more than 20 percent against the dollar over the last 12 months with the common currency gaining momentum as Trichet was speaking to reporters in Frankfurt and after the bank’s interest rate decision was announced.

After edging down against the dollar in the run-up to Thursday’s meeting, the euro began advancing again and heading back up towards USD1.28.

The consensus among forex analysts is that the euro will hit USD1.30 in the coming months with some forecasters talking about the common currency rocketing up to USD1.40 by the end of the year.

A key European economic sentiment survey released this week showed business confidence falling in December for the first time in five months as the euro charged ahead.

Drawn up by the European Commission and based on a survey of 25,000 eurozone companies, the report showed the business confidence index falling to minus 8 in December from a revised minus 6 in November.

While most economists had expected the ECB to leave rates on hold Thursday, financial markets have been speculating that the bank might be forced to deliver a rate cut in the coming months in a bid to curb the tighter liquidity resulting from the surging euro or to verbally intervene in the forex market to stem the common currency’s rise.

Indeed, even many of those analysts who had forecast an ECB rate hike by the middle of the year believe that the strength of the euro means that any monetary tightening has been delayed until nearer the end of the year.

In speaking to reporters, Trichet also expressed strong support for the moves by another eurozone states to press forward with structural reforms, including the region’s hard-pressed labour market.

But the ECB chief went on to say that more needed to be done, calling on eurozone states to build on what had already been implemented so as to ensure greater flexibility in the currency bloc’s economy.

DPA
Subject: German news