SINTRA, Portugal – European Central Bank President Mario Draghi said on Tuesday that the bank could launch further stimulus packages at its next political meeting in July, reducing the euro against the dollar and prompting a President Trump's unusual reprimand.
The comments, delivered at the ECB's annual research conference outside the Portuguese capital, represent a clear statement of intent by Draghi, who is fighting against the fallout from international trade tensions over Europe's crucial manufacturing sector. and stubbornly low inflation.
Further stimulus from the ECB could support export-oriented companies in the region by weakening the euro against the dollar and other currencies, while keeping in the hands of Mr Draghi's successor for years .
Investors reacted favorably by reducing the euro by more than half a cent against the dollar, bringing it to 1,187 dollars. German 10-year government bond yields fell to a new historic low of minus 0.307% as investors digested the prospect of new bond purchases by the ECB.
This decision triggered an attack by Mr Trump, who complained on Twitter that Mr Draghi's remarks would create an unfair advantage for European companies.
"Mario Draghi has just announced that other stimulus measures could be put in place, which immediately dropped the euro against the dollar, which made them unfairly easier to compete with the states. United States, "tweeted Trump.
Trump is known for his criticism of US Federal Reserve policy, but has so far largely ignored monetary policy decisions made by other economies.
The European Union has long been selling more goods to the United States than it has bought. But this trade surplus reached a record level of 139 billion euros in 2018, against 119 billion euros in 2017. Figures released on Tuesday showed that the bloc's surplus continued to widen in 2019, but at a slower pace, reaching 48.2 billion first four months of the year.
The advisers of President Trump have been complaining for years that the euro is clearly undervalued. The US administration has threatened to impose tariffs on European exports of automobiles unless the Union concludes a trade agreement with the United States.
"European markets have increased following comments (unfair to the US) made today by Mario D !," tweeted Trump. "They have been coming out for years, with China and others."
His comments evoke the prospect of a "nightmare scenario" in which the ECB and the Federal Reserve engage in a race to the bottom of exchange rates, creating economic damage that could be compounded by tariffs Frederik Ducrozet, economist at Pictet Wealth Management in Geneva.
The ECB is not alone in considering new stimulus measures. The major central banks of the world have changed rapidly in recent months. They put aside their plans to raise interest rates in the short term and instead sought to soften their policies in the face of signs of a slowdown in the global economy.
Many central banks in the Asia Pacific region, including New Zealand and Australia, have already reduced their interest in recent weeks. The Federal Reserve could signal on Wednesday that it is preparing to cut interest rates in the near term, as bond prices come with two rate cuts this year.
The ECB, however, is in a more delicate position, as its key rate is minus 0.4%, almost 3 points lower than that of the Fed.
Sign of the headwinds facing Europe, exports from the euro area to the rest of the world fell 2.5% in April compared to March, said Tuesday the European Union statistics agency. At the same time, the German ZEW index, an indicator of financial market sentiment, fell 19 points to minus 21.1 in June.
Mr Draghi said ECB policymakers would consider "in the coming weeks" how to adapt its policy tools "to the extent of the severity of risk" to the economic outlook.
In particular, the ECB could change the parameters of its € 2.6 trillion bond purchase program, known as quantitative easing or QE (quantitative easing), in order to to create room for new purchases, said Mr Draghi. The bank could also further reduce interest rates and introduce tools to mitigate side effects, he said.
"The genius of the rate cut is out of the bottle," said Bart Hordijk, FX market analyst at Monex Europe. "This opens the trap to the lower levels" of the euro versus the dollar.
This compares to a dull market reaction to the latest ECB decision two weeks ago. Then, the ECB announced that it would not raise short-term interest rates by mid-2020, but investors were underwater, pushing the euro higher against the dollar.
Any initiative to revive the quantitative easing program would represent a radical change, of course, on the part of the ECB, which only abandoned the program in December and until the end of the year. recently encouraged investors to plan for interest rate hikes.
The ECB currently buys no more than 33% of the bonds of a given government as part of its quantitative easing program. Increasing this limit could lead to further controversy and legal problems in Germany, Europe's largest economy, where officials have long been deeply skeptical about ECB bond purchases.
Draghi warned on Tuesday of the "continuing weakness" in forecasting economic indicators, and said the risk of protectionism and the vulnerabilities of emerging markets weighed heavily on Europe's vast manufacturing sector.
"In the absence of improvement, so that the sustained return of inflation on our goal is threatened, additional stimulus will be needed," said Mr Draghi.
This is Draghi's latest speech at the ECB's Sintra Research Conference, Europe's response to the Fed's Jackson Hole meeting, before the end of his eight-year term in October. This indicates that the Italian could be felt for some time after his resignation, regardless of the choice of European leaders.
Horse traders among European leaders who will succeed the Italian could reach their peak at a summit in Brussels Thursday and Friday.
"Even a new, more hawkish ECB president will need time to unravel before further tightening can even be put on the agenda," Hordijk said.
-Paul Hannon in London contributed to this article
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