LONDON (AFX) - Bank of England governor Eddie George said he is "modestly optimistic" about the prospects of a U.S. recovery but said he recognises the downside risks to an upturn.
In an address to a Jiji Press seminary here, he said that while U.S. data has not been as weak as many commentators predicted, pessimists fear a possible period of negative growth and global financial instability.
The recent somewhat erratic recovery of U.S. stock markets from their earlier gloom suggests that they are beginning to side with the optimists; some of the survey evidence of consumer and business confidence on the other hand still supports a rather more pessimistic view," George said.
"For what it is worth, and given the strong policy response in the U.S., I am modestly optimistic, but I recognise the downside risks," he said.
Turning to the euro zone, he said the weakness of the single currency has prompted "unjustified" criticism of the European Central Bank.
Against the measure of consistently low inflation, George said the ECB has been relatively successful.
"The ECB would have put that internal stability of the euro area as a whole at risk if it had attempted at the same time to use monetary policy to target the euro's exchange rate, which is what implicitly many of its critics were effectively suggesting that it should do," he said.
As for the claim that the ECB has been too slow to respond to the U.S. downturn, he said nobody could be confident if the bank has been right or wrong.
"But, as it showed just recently in making a modest reduction in interest rates, the ECB is sensitive to changes in the balance of risks around those judgements," he said.
Addressing the question of sterling's strength against the euro, George said the BoE could not target the exchange rate without putting the stability of the UK economy at risk of re-emerging inflation.
"That would not be in the interests even of the internationally-exposed sectors of the economy except possibly in the short term," he said.
"They operate in the same labour market as more domestically-oriented businesses; and what matters to them is the real, rather than the nominal exchange rate, and it is not at all clear how that would be affected," he said.