FRANKFURT (AFX) - European Central Bank chief economist Otmar Issing said intervention in the currency market is an instrument that can be used by the bank to support the euro and that the ECB is interested in the value of the euro against other currencies.
Asked whether the ECB would intervene to support the euro, he told reporters last night he would only say two sentences on the subject: "That it is part of any central bank's arsenal and that the central bank is interested in the external value of the euro."
"It is used and one does not speak about it in advance," he added. He said the ECB's previous interventions were executed by the bank on its own as well as with the help of central banks from outside the euro area.
"We've done both and with success," he said.
Turning to the effect of the euro weakness on the inflation rate, Issing said "a weakness in the currency rate is linked with the increase in import prices, which has a negative effect on the inflation rate."
Given this, he added, "the exchange rate development is also part of the analysis" that flows into ECB monetary policy decisions. He said the euro depreciation this year has not "tamed" price developments and has weakened real purchasing power.
He said the concern that conversion to euro notes next year might lead to price increases is an issue which "one must seriously take into consideration".
But he added that other developments, such as market competition, will help to counteract any "misuse" in converting prices to euro denomination.
Issing also said the ECB is confronted with a "difficult situation" in which economic growth in the euro area is slowing down and at the same time inflation is growing."
He said inflationary growth has been influenced by oil prices and the effects of the BSE crisis, adding that the effects of the disease on price developments is "something which we have underestimated." He said about 1/2 percentage point in the euro area inflation rate HICP is attributed to effects of mad cow disease.
Although economic growth in the euro area is slowing, Issing does not see any recession nor stagflation happening in the region.