Euro’s strong show­ing may de­lay Draghi’s QE cut­backs

The Sunday Telegraph - Money & Business - - Business - By Tim Wal­lace

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.

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