Written by DAVID McHUGH-AP Business Writer
(AP) — The European Central Bank could unleash more stimulus if the economy doesn’t pick up soon, its president warned Tuesday, sparking a sharp drop in the euro and drawing an angry tweet from U.S. President Donald Trump.
Mario Draghi told a conference in Sintra, Portugal, that the ECB was not resigned in its quest to perk up the economy and said that “in the absence of improvement… additional stimulus will be required.”
Europe’s top central banker even held out the prospect of cutting interest rates, though they are already at record lows.
“Further cuts in policy rates… remain part of our tools,” he said. Draghi noted it was also possible to re-start a bond-buying stimulus program that had been halted only in December.
Investors read the comments as a clear step toward more stimulus in coming months, causing stock markets to rally and sending the euro lower against the dollar.
Draghi’s statement was met with anger from Trump, who suggested it was an effort to boost European exports by weakening the currency. Trump wrote on Twitter that the lower euro was “making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.”
Asked about the tweet by a conference moderator, Draghi said that the European Central Bank was ready to use all available tools to achieve its mandate of stable prices and added that “we do not target the exchange rate.”
The euro traded at $1.1187 by late afternoon in Europe, down from $1.1241 before Draghi’s speech. Germany’s main stock index surged over 2%.
Rate cuts and monetary stimulus are aimed at loosening credit for businesses and consumers and at the same time can send a currency’s exchange rate lower. Since stimulus measures can do both, it can be a matter of debate about how much intent there was to lower the currency. A weaker euro can give European exporters a price advantage over U.S businesses.
Trump has cited the currency issue in his criticism of Europe over what he describes as unfair trade practices.
Talk of re-starting stimulus comes only six months after the ECB phased out a 2.6 trillion euro ($2.9 trillion) bond-purchase program that pumped new money into the economy over almost four years in an attempt to drive inflation higher.
The ECB’s shift to a pro-stimulus stance mirrors that of the U.S. Federal Reserve, which has halted a series of interest rate hikes. Fed Chair Jay Powell has said that the Fed is prepared to respond if it decides the U.S.-China trade conflict is threatening the U.S. economy. Investors read his remarks as a signal that the Fed will likely cut interest rates this year.
Both the ECB and the Fed, which holds a policy meeting Tuesday and Wednesday, have cited similar reasons for their policy shift — the threat of a softening global economy if Trump and the Chinese don’t reach agreement on trade. Any rate cuts by the Fed could in theory add to pressure on the ECB if they result in a weaker dollar against the euro.
Eurozone inflation of 1.2% is below the European Central Bank’s goal of just under 2%, considered best for the economy, while growth prospects are under pressure from uncertainty about issues such as the U.S.-China trade dispute, which could lead to more tariffs and less trade. There is also no clarity on the terms of Britain’s planned departure from the European Union.
Draghi said that in the absence of stronger inflation “additional stimulus will be required” and that the bank would “use all the flexibility in our mandate” to push inflation toward the goal.
The remarks largely echoed statements at his news conference following the bank’s last policy meeting on June 6. On Tuesday he emphasized that bank officials “are not resigned to having a low rate of inflation forever, or even now.”
At the June 6 meeting the central bank extended the earliest date for an interest rate increase from year-end to the middle of next year.
The bank’s key policy rates are at record lows: zero for lending to banks and minus 0.4% on deposits left overnight at the ECB by commercial banks. The negative rate is a penalty aimed at pushing banks to lend the money.
The Frankfurt-based ECB sets monetary policy for the 19 European Union countries that have joined the shared euro currency. It tries to steer inflation by adjusting interest rate benchmarks and, if needed, by purchasing financial assets. Central bank actions have wide-ranging impact on consumer pocketbooks and the finances of banks, companies and governments. Lower rates and monetary stimulus measures mean cheaper borrowing, but scantier returns for savers. Stimulus can also push up the prices of assets such as stocks and bonds.