(Bloomberg) -- Mario Draghi is watching closely for any signs that confidence in the economy is being dented by the current heated rhetoric over global trade.
“The effect of the tariffs that have been imposed or announced to be imposed, the specific direct effects are not big,” the European Central Bank president told students in an event at the institution’s headquarters in Frankfurt on Wednesday. “There is another more subtle channel through which these tariffs or trade exchanges can affect the economy. And I’d say we have to be especially mindful of this channel, which is the confidence channel.”
The ECB’s cautious progress toward exiting years of extraordinary monetary stimulus is being complicated by an escalation of political threats by the U.S. and China to impose tariffs on each other’s exports. Draghi said companies might postpone investments as they wait and see what happens and the drag on confidence “can be very important in the coming months -- this is something we need to really look at.”
The global tone took a conciliatory turn on Wednesday after Chinese President Xi Jinping pledged to push forward with economic opening and unveiled plans that addressed issues central to U.S. trade complaints.
Recent euro-area data have disappointed, with gauges for economic activity and retail sales missing economists’ estimates and investor confidence slipping. The slide has been particularly pronounced in Germany, the largest economy, where exports and industrial output both saw a sharp drop in February.
External risks are currently the main source of concern for policy makers, Draghi said, adding that the region’s steadfast expansion is bolstering his conviction that wages will eventually pick up.
“At some point we know that nominal wages will respond, and therefore inflation will respond to the improvements in the economy,” he said.
Governing Council member Ardo Hansson, speaking in Frankfurt the same day, echoed that optimism. The ECB should move ahead with policy normalization “maybe with a little bit more courage, but I think that all these changes need to be gradual,” the Estonia governor said.
The ECB next meets to set policy on Apr. 26. It currently pledges to keep buying bonds at a pace of 30 billion euros ($37 billion) a month until at least September, and to keep interest rates at record lows until “well past” the end of net asset purchases. Investors largely foresee buying being tapered to a halt by the end of this year, with a rate hike about six months later.
Austrian central bank Governor Ewald Nowotny said in an interview published Tuesday that he’d support first raising the deposit rate, currently minus 0.4 percent, before tackling the main refinancing rate, which is at zero. In an unusual move, the ECB responded by saying Nowotny’s views are his own and don’t reflect the stance of the rest of the Governing Council.
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