As U.S. Fed moves rates higher, ECB charts its own course
While the Fed prepares more hikes, ECB signalled it won’t raise rates until next summer
FRANKFURT— The European Central Bank is expected to signal its intention to keep its key interest rate below zero for at least another year on Thursday, underscoring a widening gap with the Federal Reserve which is moving steadily toward higher interest rates.
The divergence between the world’s top two central banks, reflecting a division in economic fortunes, received renewed attention last week after President Donald Trump said on CNBC that he wasn’t happy with the Fed’s recent decisions because every time the economy strengthens “they want to raise rates again.” He also chided officials in China and Europe for weakening their currencies.
The euro has fallen to $1.17 from as high as $1.25 earlier this year after the ECB signaled increases from the current minus 0.4% policy rate were off the table for now, helping to support the region’s export-focused companies. In contrast, the Fed’s key rate is at a 1.75% to 2% range and is expected to rise further this year.
Still, even if Mr. Trump’s comments have some rooting in recent market trends, many central bankers see such political interventions as a dangerous encroachment on their independence.
Jean-Claude Trichet, the for- mer president of the ECB, rebuked Mr. Trump in an interview for his Fed critique.
“I strongly hope that all executive branches will respect this independence, including in the U.S., where putting into question the remarkable credibility of the Federal Reserve could be devastating,” said Mr. Trichet, a 75-year-old Frenchman sometimes known as “Mr. Euro” for devoting much of his career to building the common currency.
Central bankers argue that their independence from politicians, secured in recent decades, gives investors greater confidence that officials will make unpopular decisions in the best interest of the economy, such as raising rates to keep inflation in check.
Foreign-exchange and bond markets swooned last week following Mr. Trump’s comments, which marked a departure from a convention under which governments have refrained from speaking about monetary policy.
While the Fed has signaled it will raise interest rates four times this year to keep pace with a U.S. economy currently growing at an annualized pace of 4.5%, the ECB signaled last month that it won’t raise rates at least through next summer. That helped cushion any impact in financial markets from the bank’s decision to phase out its 2.5 trillion euro ($2.9 trillion) bond-buying program, known as quantitative easing or QE, later this year. But some analysts questioned this interest-rate guidance given that eurozone inflation, at 2% in June, is slightly above the ECB’s medium-term target.
The minutes of the ECB’s last policy meeting on June 13-14 show that, even as they decided to end QE, officials worried about signs of an economic slowdown and headwinds from trade tensions and fractious financial markets. A decline in an index of European purchasing managers in July, reported Tuesday, confirmed this softening trend.
ECB officials are expected to underscore a message of caution after a policy meeting on Thursday. President Mario Draghi is likely to face questions at a news conference about the threat of trade and currency wars.
Ironically, one reason for the euro’s recent weakness is precisely Mr. Trump’s rhetoric, specifically his threat of tariffs on European goods, says Dirk Schumacher, an economist with French bank Natixis in Frankfurt.
“Of course the ECB’s monetary policy does impact the exchange rate. But did the ECB purposefully act to weaken euro? I don’t think so,” Mr. Schumacher said. “It’s now clearly moving in the other direction by ending its bond-buying program.”