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ECB Signals Possible Rate Cut Prompting Trump Tweets – The Wall Street Journal


Mario Draghi, president of the European Central Bank, at the ECB headquarters in Frankfurt on June 12.


Andreas Arnold/Bloomberg News


SINTRA, Portugal—European Central Bank President Mario Draghi signaled Tuesday that the bank could roll out fresh stimulus as soon as its next policy meeting in July, sending the euro lower against the dollar and prompting an unusual rebuke from U.S. President Donald Trump.

The comments, delivered at the ECB’s annual research conference outside Portugal’s capital, represent a clear statement of intent from Mr. Draghi, who is wrestling with the fallout from international trade tensions on Europe’s critical manufacturing sector and stubbornly low inflation.

Fresh ECB stimulus could support the region’s export-focused companies by weakening the euro against the dollar and other currencies, while binding the hands of Mr. Draghi’s successor for years.

Investors responded favorably, sending the euro down by more than half a cent against the dollar, to $1.1187. Yields on 10-year German government bonds fell to a fresh all-time low of minus 0.307% as investors digested the prospect of fresh bond purchases by the ECB.

But the move triggered an attack from President Trump, who complained on Twitter that Mr. Draghi’s words would create an unfair advantage for European businesses.

“Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA,” Mr. Trump tweeted.

Mr. Trump is known for his criticisms about Federal Reserve policy but has until now largely kept out of the monetary policy decisions of other economies.

The European Union has long sold more goods to the U.S. than it has bought. But that trade surplus reached a record high of €139 billion in 2018, up from €119 billion in 2017. Figures released Tuesday showed the bloc’s surplus has continued to widen in 2019, although at a slower pace, amounting to €48.2 billion in the first four months of the year.

Advisers to President Trump have complained for years that the euro is grossly undervalued. The U.S. administration has threatened to impose tariffs on Europe’s auto exports unless the bloc strikes a trade deal with the U.S.

“European Markets rose on comments (unfair to U.S.) made today by Mario D!,” Mr. Trump tweeted. “They have been getting away with this for years, along with China and others.”

His comments raise the prospect of a “nightmare scenario” in which the ECB and Federal Reserve engage in a race to the bottom on exchange rates, creating economic damage that could aggravated by trade tariffs, said Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.

The ECB isn’t alone in considering fresh stimulus. The world’s major central banks have rapidly shifted gear in recent months, shelving plans to increase short-term interest rates and seeking instead to ease policy amid signs that the global economy is softening.

Many central banks in the Asia-Pacific region, including New Zealand and Australia, have already reduced interests in recent weeks. The Federal Reserve could signal on Wednesday that it is preparing to cut short-term interest rates, with bond markets pricing in two rate cuts this year.

The ECB is in a trickier position, though, because its key interest rate is minus 0.4%, almost 3 percentage points lower than the Fed’s.

In a sign of the headwinds Europe faces, exports from the eurozone to the rest of the world fell 2.5% in April compared with March, according to the European Union’s statistics agency Tuesday. Meanwhile, Germany’s ZEW index, a gauge of sentiment in the financial markets, fell by 19 points to minus 21.1 in June.

Mr. Draghi said ECB policy makers would consider “in the coming weeks” how to adapt its policy tools “commensurate to the severity of the risk” to the economic outlook.

In particular, the ECB could tweak the parameters of its €2.6 trillion bond-purchase program, known as quantitative easing or QE, to create room for fresh purchases, Mr. Draghi said. The bank could also cut interest rates further and introduce tools to mitigate the side effects, he said.

“The rate cutting genie is out of the bottle,” said Bart Hordijk, FX Market Analyst at Monex Europe. “This opens the trapdoor to lower levels” of the euro against the dollar.

That compares with a lackluster market reaction to the ECB’s latest policy move two weeks ago. Then, the ECB signaled it wouldn’t raise short-term interest rates through the middle of 2020, but investors were underwhelmed, sending the euro higher against the dollar.

Any move to restart QE would represent a sharp switch of course by the ECB, which only phased out the program in December and had until recently been guiding investors to expect interest-rate increases.

The ECB currently buys no more than 33% of the bonds of any individual government through its QE program. Increasing that limit could trigger fresh controversy and legal challenges in Germany, Europe’s largest economy, where officials have long been deeply skeptical of the ECB’s bond purchases.

Mr. Draghi warned Tuesday of “lingering softness” in forward-looking economic indicators, and said the risk of protectionism and vulnerabilities in emerging markets was weighing on Europe’s large manufacturing sector.

“In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” Mr. Draghi said.

The speech is Mr. Draghi’s last at the ECB’s Sintra research conference, Europe’s answer to the Fed’s Jackson Hole meeting, before his eight-year term ends in October. It indicates that the Italian’s impact could be felt for some time after he steps down, regardless of who European leaders name as his successor.

The horse-trading among European leaders over who will succeed the Italian could reach a climax at a summit meeting in Brussels on Thursday and Friday.

“Even a more hawkish new ECB president will have to take some time to untangle her/himself before further tightening can even be put on the agenda again,” said Mr. Hordijk.

—Paul Hannon in London contributed to this article

Write to Tom Fairless at tom.fairless@wsj.com

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