Draghi Welcomes Easing of Trade Tension to Keep Economy on Track
(Bloomberg) -- Mario Draghi welcomed a trade truce between Europe and the U.S. as he pointed to a solid economy that keeps the European Central Bank on track to start raising interest rates sometime after summer 2019.
Six years to the day since the ECB president pledged to do “whatever it takes” to save the euro, he confirmed that policy makers are comfortable enough to prepare for the end of extraordinary stimulus -- with euro-zone inflation pressures now broadening as well as strengthening.
Importantly, he acknowledged that the chief risk -- a potential trade war with the U.S. that policy makers fear will damage confidence and weaken investment -- seems to be easing. President Donald Trump and European Commission chief Jean-Claude Juncker agreed on Wednesday to hold off from new tariffs and negotiate lower barriers to transatlantic commerce.
“It shows that there’s a willingness to discuss trade issues in a multilateral framework again,” Draghi said at a press conference in Frankfurt on Thursday. “It would be difficult for us to go beyond that because we don’t know the substance.”
Draghi also brushed aside another of Trump’s Twitter accusations -- that the European Union is manipulating its currency to gain an unfair competitive advantage.
“There is an international consensus, that’s been going on for years, for decades perhaps, about abstaining from competitive devaluations,” he said. “Incidentally if one looks at nominal exchange rate of euro, vis-a-vis all the trading partners, the euro has appreciated considerably over last year, year and a half.”
In a press conference notable for its brevity -- 40 minutes instead of the typical one hour -- Draghi said the the uncertainty on global commerce remains “prominent” but the overall risks to the economic expansion are still “broadly balanced.”
His Governing Council earlier stuck to its policy path -- agreed in June -- of slowing monthly bond purchases to 15 billion euros ($17.5 billion) in October, from 30 billion euros currently, and halting them at the end of the year.
Interest rates will remain unchanged “at least through the summer of 2019” -- a phrasing has puzzled some investors. Draghi said market expectations for when borrowing costs will first rise are “tightly aligned” with the Governing Council’s thinking. Traders foresee an 85 percent chance of a 10 basis-point increase in the deposit rate in third quarter of 2019, with a hike fully priced in by year-end.
What Our Economists Say...“Our core scenario remains for the first hike to occur in September 2019. That should be a mini increase of just 15 basis points to the deposit rate to restore normality to the ECB’s interest rate corridor. The next increase is likely to be a full 25 bps to all three of its main policy rates.”
-- David Powell and Jamie Murray, Bloomberg Economics.
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While “uncertainty around the inflation outlook is receding,” Draghi cautioned that it is too early to declare mission accomplished.
The ECB has left the door open to more stimulus if economic conditions worsen significantly. For now though, Draghi made clear there was little to talk about. Even the plan for reinvesting maturing debt, a topic which the ECB chief has previously said is “important” to decide upon, wasn’t discussed.
That summed up the low-key nature of the meeting for what Draghi said is now a “very different” central bank with a “much richer set of monetary-policy tools” than six years ago, when he made his famous speech.
“Frankly, I have not realized all these anniversaries myself,” he said. “These are very distant times.”
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