European Central Bank policy maker Olli Rehn warned of a risk that persistent trade tensions will morph into a global currency war, a day after U.S. President Donald Trump attacked ECB President Mario Draghi for weakening the euro.
Rehn said the exchange rate isn’t a policy target and officials are taking decisions based on economic developments in the euro zone. Draghi said on Tuesday that additional monetary stimulus will be required if the economic outlook doesn’t improve.
“The U.S. is not completely innocent to these developments,” he said in a Bloomberg Television interview with Matt Miller at the ECB Forum in Sintra, Portugal. “It will be even worse if we would have a currency war and in fact we should all try to avoid these kind of developments.”
His colleague Carlos Costa, governor of Portugal’s central bank, told Bloomberg TV that Trump might not understand the ECB’s goals.
“Our target is not the exchange rate, our target is inflation,” he said. “It’s normal that there are comments, namely from those that don’t understand what is the independence and the aim of the ECB.’’
Rehn said the Governing Council stands ready to take action and adjust all its instruments. That includes cutting interest rates and resuming quantitative easing.
“This toolbox is at our disposal and we will consider and discuss and—as appropriate—take decisions on this in our forthcoming meetings,” he said. He declined to say when the central bank might act.
Draghi’s comments, just months before his eight-year term ends, have sparked speculation which tools the ECB will deploy first. Its arsenal is already facing constraints after years of trying and failing to restore inflation to its goal of just under 2%.
“That’s one of the lessons learned over the crisis that when you use unconventional measures it’s the overall effect of the package that matters,” Rehn said. “We have to look at this as an overall package that we may need to activate in case there is no improvement in economic developments.”
He also raised the possibility that cutting rates deeper below zero may need to be accompanied with measures such as tiering that would exempt some bank reserves from the charge on overnight deposits. Banks say they can’t easily pass that cost onto customers, squeezing profitability and potentially impairing lending.
“We have to discuss which mitigating measures we would take,” Rehn said. “There is a very strong will in the Governing Council that in case there is further rate cuts then we need mitigating measures.”
