ECB's Nowotny Sees No Need to Overdramatize Euro Appreciation

  • Policy normalization should proceed ‘carefully’, governor says
  • Reaching inflation goal still difficult, says ECB’s Constancio

The appreciation in the euro-area’s single currency is no big reason for concern, according to European Central Bank Governing Council member Ewald Nowotny.

“Since the introduction of the euro, there were significant movements of the euro-dollar rate. We’re now roughly where we were when the euro was introduced,” he said Friday in Alpbach, Austria. “Therefore, I wouldn’t over-interpret or dramatize.”

Ewald Nowotny

Photographer: Krisztian Bocsi/Bloomberg

The Austrian central bank chief highlighted that policy normalization cannot be about “stepping on the brake, and even abruptly stepping on the brake” and that it’s important to go about the process “carefully”. Those comments were echoed by ECB Vice President Vitor Constancio, who spoke the same day in Cernobbio, Italy, about the difficulty in reviving inflation.

“Taken together, the broadening of the recovery across countries and sectors suggests that it has not only gained momentum but, importantly, the recovery has gained robustness,” Constancio said. Even so, “the strong worldwide reflationary phase that seemed likely at the beginning of the year has not materialized. Therefore, the tasks of normalizing inflation and unemployment to acceptable levels continue to be difficult.”

The euro rose as much as 0.2 percent against the dollar to $1.1930, before paring gains to 1.1913 at 12:32 p.m. Frankfurt time. It’s appreciated 13 percent so far this year.

Growth Momentum

The ECB officials’ remarks indicate that strengthening momentum in the 19-nation economy, which saw gross domestic product expand 0.6 percent in the second quarter, hasn’t been enough to convince policy makers that the region is ready for a withdrawal of monetary support. The ECB’s 2.3 trillion-euro ($2.7 trillion) bond-buying program is set to be assessed next week when the Governing Council meets to update policy.

One factor that is likely to weigh on their discussion is that consumer-price growth continues to remain below the ECB’s goal. Underlying cost pressures failed to accelerate in August even as the headline rate rose to 1.5 percent, and an appreciating euro has sparked concern among some policy makers that an overshoot could weigh on growth and further delay a sustained pickup in consumer prices.

Nowotny’s comments indicate that he’s not too concerned that the current appreciation will snuff out the recovery. A report earlier on Friday showed that euro-area manufacturing output increased at one of the fastest rates since 2011, and high levels of confidence among businesses suggest that the current strong growth spell has further to run. Constancio also expressed praise for the economy’s strengthening.

“The ongoing cyclical recovery in the euro area is now broader and more consolidated,” Constancio said. The region is “better prepared to resist financial market shocks.”

— With assistance by Piotr Skolimowski

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