Euro’s strong showing may delay Draghi’s QE cutbacks
MARIO DRAGHI might delay his plans to cut down quantitative easing when the European Central Bank meets for its crunch policy gathering this week, with economists fearing the recent strength of the euro could damage the bloc’s economy.
The ECB, of which Draghi is president, is expected to detail its plans to reduce money printing on the basis that the eurozone economy is performing strongly and inflation is edging upwards, meaning policymakers no longer need to keep their foot to the floor in terms of stimulating growth.
But the euro has shot upwards against the dollar and the pound in recent months, in part in anticipation of this policy plan, known as tapering.
The strong euro means the price of imports falls, reducing inflation, and it also makes eurozone goods less competitive globally, threatening to dampen exports and hit growth. As a result tapering could be postponed.
“We have been caught off guard by the strength. And we believe that strength is beginning to jangle some nerves among some ECB policymakers,” said economist Andy Cates, at Nomura. “The asset purchase programme [QE] will now be wound down over the first nine months of next year, not six as we were previously forecasting,” he added.
Jennifer Mckeown, at Capital Economics,
‘We have been caught off guard by the strength. And we believe that strength is jangling some nerves’
said: “The appreciation of the single currency since the ECB’S last meeting has strengthened the case to delay the formal announcement of asset purchase tapering until October.”
There is further reason for caution because the ECB raised rates in 2011 in what turned out to be a premature move, damaging the recovery of the eurozone.