The European Central Bank keeps a close eye on the euro exchange rate to see how it affects inflation, and it stands ready to act if the inflation rate appears headed in the wrong direction, ECB Governing Council member Erkki Liikanen said on Monday.
The euro’s exchange rate is not an ECB policy target, but it has become increasingly relevant in the central bank’s economic assessment. A stronger euro could hamper the 28-country bloc’s recovery and weigh on already-low inflation.
“We look at foreign exchange as much as it has an impact on inflation,” Liikanen, who is also governor of Finland’s central bank, said at the presentation of its quarterly bulletin.
Liikanen called inflation pressures “moderate” and said the ECB was “ready to take further decisive action” if needed.
Euro zone inflation stood at 0.7 percent in February, far below the ECB’s target for close to but below 2 percent. The ECB expects inflation to rise slowly over the next couple of years to 1.5 percent in 2016 and it sees only limited deflation risks.
Asked whether the ECB should ease policy further, Liikanen stressed the ECB’s easing bias. The bank’s forward guidance says it will keep rates low or even lower for an extended period.
“We assess the situation in each meeting,” he said. “One has to remember that we have a clear downward bias … we have also added to our communication the unused capacity in the economy, and that monetary policy will remain accommodative well into recovery. All this has made our communication very strong.”
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