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Draghi Gauges Trade War Threat as ECB Ponders Stimulus Path

Mario Draghi’s progress toward a stimulus exit is likely to stay slow for now.

Draghi Gauges Trade War Threat as ECB Ponders Stimulus Path
Mario Draghi, president of the European Central Bank (ECB), speaks during a news conference in Berlin, Germany. (Photographer: Krisztian Bocsi/Bloomberg)

(Bloomberg) -- Mario Draghi’s progress toward a stimulus exit is likely to stay slow for now, with inflation too low for comfort and the global economy up against a trade-war-in-waiting.

U.S. tariffs and retaliation by Europe and others could harm the outlook for the euro area, where exports have played a huge role towing the economy out of its slump. That could add to the European Central Bank president’s argument when he pushes back against some ECB officials lobbying for a change to policy guidance.

Draghi Gauges Trade War Threat as ECB Ponders Stimulus Path

If, contrary to expectations, more optimistic Governing Council members do win some concessions at Thursday’s policy meeting in Frankfurt, any language tweaks are expected to be minor. The need for patience and persistence will also be reflected in new growth and inflation forecasts.

Those will be little changed from three months ago, according to euro-area officials familiar with the matter. The projection for growth this year will be 0.2 percentage point higher while inflation next year will be slightly lower, with adjustments largely due to rounding, they said.

The euro was little changed at $1.2383 at 9:51 a.m. Frankfurt time.

So far, inflation has been a road block to scaling back support. At only 1.2 percent in February, the rate remains far from the ECB’s goal of just below 2 percent. Going forward, consumer-price growth is set to pick-up gradually.

Draghi Gauges Trade War Threat as ECB Ponders Stimulus Path

Draghi has expressed confidence that the economy’s continued strength will eventually fuel price pressures. Expansion last year was the strongest in a decade, with exports rising the most in almost three years in the fourth quarter.

What Our Economists Say...

“There’s not a whole lot more that monetary policy can do to jump-start inflation apart from intentionally overheating the economy -- a step that few central bankers would argue is a good idea.”

-- David Powell and Jamie Murray, Bloomberg Economics

For more, see our EURO-AREA PREVIEW: Draghi to Fend Off Calls for Major ECB Shift

Policy makers already identified increased trade protectionism -- as well as exchange-rate fluctuations -- as downside risks in January. Since then, gauges of market-expected future volatility have eased.

Draghi Gauges Trade War Threat as ECB Ponders Stimulus Path

At the same time, government-bond yields and the euro have risen on the back of the region’s optimistic outlook. Growth in the coming years is forecast to exceed the rate the economy can sustain long-term, reducing economic slack.

Draghi Gauges Trade War Threat as ECB Ponders Stimulus Path

Political uncertainty triggered by a strong showing of anti-establishment parties in Italian elections has the potential to damp prospects. Confidence measures have already started to retreat from multi-year highs.

Draghi Gauges Trade War Threat as ECB Ponders Stimulus Path

For Draghi, who has pledged to buy 30 billion euros ($37 billion) of assets a month until at least September and keep interest rates unchanged until well past the end of purchases, that may just be another reason to stay the course on stimulus for now.

--With assistance from Ven Ram

To contact the reporters on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net, Carolynn Look in Frankfurt at clook4@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow, Fergal O'Brien

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