Friday, October 12, 2007

ECB Change of View on Currency Pegs?

From Bloomberg

ECB May Oppose Rate Pegs in Baltics, Bulgaria, Danske Bank Says

By Milda Seputyte

Oct. 4 (Bloomberg) -- The European Central Bank `seems' to want the Baltic nations and Bulgaria to drop their exchange-rate pegs because they contribute to increasing economic imbalances, Danske Bank said.

``It seems that the ECB is suggesting what would have been unthinkable a year ago: that it is time to change the exchange- rate policies in the CEE countries with exchange-rate pegs,'' Lars Christensen, a senior analyst at Danske Bank, said today in an e-mailed note.

The three Baltic countries of Lithuania, Latvia and Estonia, along with Bulgaria, are struggling to balance the need for growth with controlling inflation and current-account deficits. Two ECB board members, Lorenzo Bini Smaghi and Jurgen Stark, said on Oct. 2 that hard peg arrangements foil government attempts to slow inflation as countries import monetary policy of the euro zone with low-interest rates.

The four countries with hard pegs to the euro have seen inflation pick up to more than double the levels in the euro zone, indicating that the economies are overheating.

Bulgaria's inflation rate, the highest in the EU, rose to 12 percent in August, while Latvia, with the fastest growing economy in the EU, had an inflation rate of 10.1 percent in August, compared with an average rate of 1.7 percent in the euro region.

``The key question for these countries is: how is it possible to keep inflation under control by pegging the exchange rate, which means adopting de facto the monetary policy of the euro area?'' Smaghi said on Oct. 2.

Growth was twice as fast and inflation was 1 1/2 times faster in countries with hard pegs than in countries such as the Czech Republic and Poland, which allow their currencies to trade freely on the market, Stark said.

``It is quite clear that urgent policy action is needed to bring down the imbalances,'' Christensen said. ``These countries will not get any help from the ECB in defending their currency pegs unless action is taken very soon.

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