Frankfurt am Main (AFP) – European Central Bank chief Mario Draghi warned Thursday of storm clouds on the horizon for the eurozone as fears mount of a global trade war, prompting the bank to keep its massive stimulus scheme in place.
Early hints a slowdown could be coming for the single currency’s 19-member nations after a year of unexpectedly muscular growth also stayed policymakers’ hands.
“Risks relating to global factors, including the risks of protectionism, have become more prominent,” Draghi told journalists at a Frankfurt press conference.
The German government expects the United States to impose tariffs on European metals imports from next month, sources told AFP Thursday — potentially sparking a transatlantic trade war that could undermine growth and inflation.
And US President Donald Trump’s threats of tens of billions of dollars of border levies on Chinese imports and Beijing’s warning of a response in kind could also throw the world economy off track.
“We don’t know the extent of the retaliation yet” or the impact of possible trade wars, Draghi said, while adding that heated rhetoric could already be having a “profound” effect on business confidence, indirectly undermining growth.
Looking to indicators of economic activity such as industrial production or business confidence, Draghi acknowledged that “declines were sharp” in recent weeks across countries and economic sectors, hinting at “some moderation” in growth.
But he said “careful assessment, monitoring… more information” were needed before deciding how the ECB should respond, arguing that the data for now remain “consistent with a solid and broad-based expansion”.
Draghi’s cautious comments sparked a sell-off in the euro, which slumped 0.4 percent against the dollar to hit $1.211 in late afternoon trading.
As expected, ECB governors made no changes to the bank’s easy money policies, opting to keep interest rates at historic lows and continue buying 30 billion euros ($36.5 billion) of government and corporate bonds per month under the “quantitative easing” (QE) stimulus programme.
– ‘Baby steps’ –
“Despite emphasising downside risks more than before, the ECB tried to not sound overly concerned,” said economist Holger Schmieding of Berenberg bank.
Policymakers will take “baby steps” towards winding down QE by the end of 2018 beginning at either June or July’s meetings, he predicted.
Lower interest rates and QE are designed to pump cash through the financial system and into lending to firms and households — powering economic growth and inflation.
But the ECB has long fallen short of its central price stability objective of inflation just below 2.0 percent.
Price growth stood at 1.3 percent in March, and central bank forecasts call for it to reach just 1.7 percent by 2020.
Draghi acknowledged that measures of core, or underlying inflation excluding the most volatile items had “moved sideways” since March.
That didn’t stop him from hammering home governors’ “unchanged confidence” that they would hit the target, pointing to “certain encouraging signs” that wages were beginning to increase — potentially boosting prices in turn.
For now, “ample” central bank support remains necessary, he insisted, reiterating his mantra of “patience, prudence and persistence”.
“Today’s ECB meeting set a new milestone in terms of buying time” commented analyst Carsten Brzeski of ING Diba bank.
However, “the June meeting will be crunch time… the ECB will have a better view on whether weak economic data were only a soft patch or the start of a downswing, and on whether inflation moving to 2.0 percent is still more wish than reality.”
Even so, it remains unclear whether the ECB could announce a move to wind down QE in June or leave a decision to July, as well as how long it will stretch out the exit for and how much flexibility it will build into its plans, Brzeski added.