–Adds Comments Interest Rates, Liquidity, ECB Bond Purchases, Greece

VIENNA (MNI) – The euro’s exchange rate is on the high side, but it
should be seen with “composure,” especially if it is a short-term
phenomenon, European Central Bank Governing Council member Ewald Nowotny
said Friday.

Speaking at a conference here, Nowotny noted that people had also
complained just a few short months ago when the euro was considered too
weak. He said the ECB had no intention of intervention in currency
markets, because to do so would compromise the central bank’s primary
goal of price stability.

“The ECB does not have a currency exchange rate target. We have
flexible exchange rates,” Nowotny, who heads the National Bank of
Austria, said. “The exchange rates are determined on the market. We
don’t interfere because that would conflict with our goal of price
stability.”

He conceded that the euro is “at a point that is relatively
high…but before there were those who worried about it being too low.”
He added: “We should see it with a certain amount of composure. If it
happens over the short term, it won’t have any massive consequences. Of
course if it happens over the long-term, it does dampen our exports.”

Overall, Nowotny boasted, “the Euro is one of the most stable
currencies of the world and is more price stable then the previous
national currencies.” Austria’s Shilling and Germany’s Deutschmark, he
noted, had higher levels of inflation.”

Nowotny also said the ECB’s currently low refinancing rate of 1% is
the result of the financial crisis, and “it won’t last forever.” The ECB
“certainly won’t be able to raise it immediately, but it is certainly
not a long-term rate,” he added. “Long term, we must assume that there
is a tendency towards an increase.”

Nowotny noted the recent sharp runup in gold prices, in tandem with
the drop of the dollar, and said it was based on “a certain amount of
fear — fear of inflation, fear of other consequences.” But, he assured,
“such fears are not justified. For the [euro] area, we don’t see any
risk of inflation.”

With regard to the ECB’s non-standard liquidity measures introduced
during the financial crisis, Nowotny reiterated that the central bank is
“in the process of the exit strategy” and that “successively, these
measures are being removed…in an exact way so that we can keep our
goal of price stability.”

But although the ECB has already withdrawn unlimited allotment
operations at the six- to twelve-month end of the spectrum, it will
continue to provide it at shorter maturities, “as long as we still see
that there are fluctuations and instability in the financial markets,”
he said. “But the goal is to return to the normal situation of before
the crisis.”

Nowotny clearly disagreed with recent remarks by Bundesbank
President Axel Weber, who said the ECB should begin to phase out its
government bond buying program and that the phase-out should be
permanent.

“As you saw in the last few weeks, things have normalised. We also
for example didn’t buy any [bond] last week,” Nowotny noted. “I think it
makes sense though, in this very sensitive environment, to keep the
instrument as a so-called lifesaver. That means not to buy bonds now,
but to keep the institution.”

He drew a distinction between the ECB’s bond buying and that of the
U.S. Federal Reserve and Bank of England.

“This is not a program in terms of money supply, it is different
than what the US and UK national banks [have done],” he said. “We don’t
see it as a money supply instrument, but exclusively as an instrument to
calm irrationality on the markets. That was also successful.”

The Greek crisis, which sparked the wider Eurozone debt crisis
earlier this year, was “due to mistakes, of course from Greece itself,
but also, to be critical, mistakes at the European Union level,” Nowotny
said. He noted that there wasn’t sufficient oversight of Greek
statistics by Eurostat, the European Commission’s statistical agency.

“It is important that on the European level, we have functioning
institutions over the individual countries,” he said.

He added that, “the markets underestimated the risks [in Greece].
Everything led to a false conclusion, with the end effect of higher
deficits. And now we have a very painful restructuring process. But it
is necessary.”

–Frankfurt newsroom, +49-69-720-142; frankfurt@marketnews.com

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