April 2, 2013 / 4:32 PM / in 5 years

ECB's Coeure warns against consequences of currency war

WASHINGTON (Reuters) - ECB policymaker Benoit Coeure warned against currency wars on Tuesday, saying currency swings brought about by misguided policies have the potential to become disruptive, especially if other central banks have limited room to maneuver.

Coeure, a European Central Bank Executive Board member, spoke shortly before the first policy-setting meeting of the new Bank of Japan’s Governor, Haruhiko Kuroda, who wants to achieve the BOJ’s inflation target in two years by taking aggressive monetary policy both in terms of the volume and type of assets it purchases.

In the text of a speech prepared for a conference on currency wars, Coeure said that especially since central banks in advanced countries are close to reaching the limits of their conventional policies, it would be a matter of concern if countries were to directly pursue overt competitive devaluations, particularly by resorting to large purchases of foreign assets.

Japan’s expansive policies, pushed by Prime Minister Shinzo Abe, which aim to put an end to nearly two decades of grinding deflation, have driven down the yen and triggered a debate about competitive devaluation earlier this year.

A firm statement by the Group of 20 countries in February saying there would be no currency war - essentially countries competing to weaken their currencies - eased worst fears of such an event.

“As much as exchange rate movements are the natural result of policies aimed at achieving sound and legitimate domestic targets, such as price stability, and as long as other central banks are not constrained in their ability to take offsetting actions, there is no reason for concern,” Coeure said.

“Keeping one’s own house in order, however, is quite different from sticking one’s head in the sand. Especially in the current conjuncture, the room for policy actions might be reduced, or countervailing interventions might have become more costly,” he said.

Then, he added, large and sustained currency swings might hinder the achievement of domestic targets.

He stressed that the exchange rate was not a policy target for the ECB, but it mattered for price stability and growth.

“If contrary to the objective of medium term price stability, it may thus trigger offsetting policy actions,” he said.

Reporting by Anna Yukhananov in Washington, writing by Eva Kuehnen and Sakari Suoninen in Frankfurt

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