Draghi Given Triple Whammy of Reasons to Demand ECB Patience

(Bloomberg) -- Mario Draghi has just received a triple whammy of evidence to justify playing it safe when he meets with fellow European Central Bank policy makers this week.

U.S. President Donald Trump's plan to impose tariffs on foreign steel and aluminum has raised the specter of a global trade war, and the anti-establishment surge in Italy puts a question mark over the political outlook for one of the euro area's biggest and most-indebted economies. Meanwhile, the upswing in the 19-nation bloc may be hitting a speed bump.

The burst of negative news ahead of the ECB's March 8 policy meeting strengthens the argument repeatedly made by President Draghi that officials must be patient and persistent in providing stimulus. It may also undercut those on the Governing Council who have pushed for a change in the central bank's language to signal the end of asset purchases is nearing.

“We remain in a period that will last for another 12 months -- give or take -- when if any kind of shock happens, whether it's political or economic, then the ECB will err on the side of dovishness,” said Rupert Watson, head of asset allocation at Mercer Ltd. in London. “Draghi is very clear that monetary stimulus will remain until it is absolutely not necessary.”

At the ECB's previous policy meeting in January, officials acknowledged the euro area's robust economic expansion, while also pointing to downside risks relating to geopolitical uncertainties and, specifically, to an increase in protectionism.

Trump crystallized one of those risks over the weekend when he threatened to tax European cars if the bloc retaliates against his tariff plans by slapping duties on selected U.S. products.

The European Commission has proposed import charges on U.S. steel, apparel, footwear and selected industrial goods worth 2.8 billion euros ($3.5 billion), according to draft list seen by Bloomberg. The list includes motorbikes and bourbon whiskey.

Investors are already on edge, with Sentix's gauge of euro-area sentiment dropping to the lowest in almost a year.

Indicators for the 19-nation region's economic activity have also weakened. Manufacturing and services grew the slowest in four months in February and business confidence declined.

“These new economic question marks reduce the pressure on the ECB to tighten its monetary-policy reins,” said Manfred Huebner, managing director at Sentix.

A Bloomberg survey last week showed economists no longer predict the ECB will change its guidance on future policy this week, delaying the adjustment until June. 

Since then, the Italian election created another obstacle. The vote put two anti-establishment parties in pole position to lead a future government, with Matteo Salvini, the leader of the anti-migrant League, already predicting the demise of the euro area.

“Draghi is not in a hurry to change anything,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam. “Making significant adjustments to their communication right now could cause confusion and they would be better off to wait until they are ready to taper.”

--With assistance from Guy Johnson

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow, Brian Swint

©2018 Bloomberg L.P.