European Central Bank policy will remain accommodative for longer than in previous cases of demand shock, likely limiting the negative impact of the euro`s appreciation, ECB Executive Board member Benoit Coeure said on Monday.
Coeure`s comments suggest that policymakers are relatively relaxed about the currency`s 14 percent rise against the dollar this year, even as ECB President Mario Draghi singled out the exchange rate last week as a source of uncertainty which requires monitoring.
"Compared with past demand shocks, policy will remain more accommodative for longer, thereby likely muting further the pass-through of any growth-driven exchange rate appreciation," Coeure told a conference in Frankfurt.
"And with the current recovery in the euro area being largely driven by domestic demand, euro strength may also have less of an impact on growth than, for example, after the Great Financial Crisis," he added.
The ECB targets inflation at almost 2 percent over the `medium term`, an undefined concept that is influenced by the size of any inflation shock.
The bank has undershot its price growth target for four and a half years and will not raise inflation back towards 2 percent before 2020, its new projections from last week show.
Still, it is expected to curb stimulus when policymakers meet in October as the threat of deflation is long gone and growth is far better than policymakers expected just a few months ago.
"At the current juncture, however, the policy-relevant horizon – the `medium term` concept in our monetary policy strategy – is likely to be longer given the persistence of subdued inflationary pressures," Coeure said.
Although seemingly relaxed about the currency appreciation, Coeure also warned that a persistent external shock could meaningfully alter the inflation outlook.
"Exogenous shocks to the exchange rate, if persistent, can lead to an unwarranted tightening of financial conditions with undesirable consequences for the inflation outlook."
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)