Austrian central bank governor Martin Kocher said in an interview with the Financial Times published on Wednesday that the European Central Bank may need to consider another interest rate cut if the euro's rise continues to affect inflation.
Kocher, a member of the European Central Bank's Governing Council, said the recent strength of the single currency against the dollar was modest and does not currently warrant a policy response.
But he warned that a continued rise could push import prices down and affect the European Central Bank's inflation forecasts.
Kocher told the Financial Times: “If the euro continues to rise higher and higher, it may at some point create a need for monetary policy intervention. But not because of the exchange rate itself, rather because the exchange rate translates into lower inflation.”
The euro rose to its highest level in more than four years at $1.1990 on Tuesday, extending gains as the dollar weakened amid investor concerns about US policy risks and geopolitical tensions.
Markets also watched speculation about the possibility of coordinated action by the United States and Japan to support the yen.
Kocher said that a stronger euro could lower import prices, while also damaging the competitiveness of the eurozone, particularly against US companies. He added that the Chinese yuan is structurally undervalued against the euro.
The Austrian policymaker declined to specify a currency level that would be cause for concern, emphasizing that the European Central Bank does not target the exchange rate. He stated, It would not be serious to have an exchange rate target – the target is the inflation rate.
Kocher also warned that trade risks remain high despite US President Donald Trump backing down last week from plans to impose tariffs on European countries over tensions related to Greenland.
He said that trade-related risks remain and are likely to continue to do so for the foreseeable future.
However, Kocher said the eurozone economy had proven more resilient than expected and that he was cautiously optimistic about growth this year. He said the risks were now more balanced than they had been in the spring of 2015, when the Trump administration announced sweeping tariff measures.
Upside risks include increased household spending if savings rates decline, while downside risks stem from trade tensions, geopolitical developments, and a possible correction in stock markets.
Kocher said that at present, there is no need to change interest rates before the European Central Bank's meeting in February next week. The central bank is widely expected to keep interest rates unchanged at 2% for the fifth consecutive meeting.
He said: It makes perfect sense at the moment to maintain full flexibility in monetary policy decisions: the situation is uncertain.
