Trade war set to impact exchange rates

Aglobal trade war could have have widespread negative effects including in currency markets, one of the European Central Bank’s top policymakers said yesterday.

“Trade wars have negative effects for all involved,” Austria’s central bank head, Ewald Nowotny, said at a SUERF economics conference.

“The direct effects might be on the exchange rate side but this is difficult to see or to forecast because today we have so many linkages, we have long production chains... It might have negative effects on financial stability, but effects on monetary policy are not very clear.”

Nowotny added that the ECB did not have an exchange rate target and that he did not want the central bank to make any changes to its goal of keeping inflation just under 2 per cent over the medium term.

Nowotny, one of the European Central Bank’s most experienced members, also said that the ECB should start normalising its monetary policy.

Winding down plans

The ECB is expected to lay out in the next couple of months how it will wind down the €2.5 trillion ($3.08 trillion; Dh11.29 trillion) stimulus programme it has been using to help the Eurozone’s economy over the last three years.

“Now I think it is time for a gradual normalisation of monetary policy,” Nowotny said during a speech at the economics conference.

“This normalisation requires a delicate balancing of measures as well as careful sequencing in time,” he added, saying there were risks to both being too aggressive with the process or starting it too late.

The “exceptional scale” of monetary policy provision over the past years makes the tightening process even more complex than usual, Nowotny also said.

“The Euro area economy today clearly is in the middle of a strong and broad-based cyclical upswing.”