PARIS (Reuters) - The euro’s current strength is a powerful deflationary factor and low inflation is likely to persist in the euro zone for some time, European Central Bank policymaker Christian Noyer said on Monday.
Spare capacity and deleveraging by companies and governments have created a low inflation environment that is likely to persist for an extended period, Noyer, who is also governor of the Bank of France, said in an annual letter to the French president.
Though he did not see an imminent threat of a downward spiral in prices, or deflation, Noyer said the euro’s strength added to the problem of uncomfortably low inflation.
“Given the weight of imports in the euro area’s GDP, such an exchange rate development is a powerful deflationary factor,” he said.
“An increase in the exchange rate is equivalent to an unintended and unwanted tightening of monetary policy.”
At about $1.38 currently, the euro’s strength drives import prices lower and weighs on overall inflation, which on a 12-month basis fell to only 0.5 percent in March, far below the European Central Bank’s target of less than but close to 2.0 percent.
Noyer’s view of the strong euro echoed recent comments by ECB President Mario Draghi, who has identified the strong euro as a potential trigger for policy action.
Draghi reiterated that stance last week when he said the central bank could print money to buy assets if the inflation outlook deteriorated.
Reporting by Leigh Thomas; Editing by John Stonestreet