European Central Bank Signals End of Cheap Money Era is Coming


He began laying the foundation on Thursday for plans to “taper” the stimulus. Although the European Central Bank’s Governing Council left monetary policy unchanged, Mr. Draghi said policy makers had preliminary discussions about the program, and said they would make the “bulk” of the decisions about tapering late next month.

Yet he also left himself plenty of wiggle room in case conditions change. In particular, the central bank will be keeping a close eye on the euro’s growing strength compared to the dollar, which Mr. Draghi said could alter assumptions about how the eurozone economy will perform.

“The recent volatility in the exchange rate represents a source of uncertainty which requires monitoring,” he said at a news conference.

The dollar has declined more than 13 percent against the euro this year, driven largely by tensions with North Korea and dysfunction in Washington.

When the euro rises against the dollar, European exports become more expensive — not only in the United States but also in other countries, like China, whose currencies are linked with the dollar. That typically means that European companies will sell fewer goods abroad, hurting growth and prolonging the need for central bank stimulus.

A robust euro also undercuts the bank’s efforts to jolt inflation back to the official target of 2 percent, a level considered healthy for growth. A strong euro holds down consumer prices by making imported oil and other goods cheaper for eurozone residents. That’s not all bad for people who live in Europe, but low inflation means that Mr. Draghi has to keep printing money longer than he would like.

The eurozone’s annual rate of inflation in August was 1.5 percent, and a substantial increase is nowhere in sight. According to forecasts by the central bank’s staff, inflation will still be below the target in 2019.

“It became clear at the press conference just how important the euro-dollar exchange rate is to the E.C.B.,” Jörg Krämer, the chief economist at Commerzbank in Frankfurt, said in a note to clients. “If, contrary to our expectations, the euro makes further strong gains, the E.C.B. might slow down its tapering process.”

There’s not much Mr. Draghi can do about the weak dollar, which analysts say reflects pessimism about the ability of President Trump and Congress to agree on legislation that many economists believe would help bolster growth in the United States, such as infrastructure programs or corporate tax reform.

“Investors no longer trust the American government to push through tax reform and fiscal stimulus,” Alwin Schenk, a portfolio manager at the German bank Sal. Oppenheim, said in a note to clients.

The dollar’s decline is also an expression of the nervousness investors feel about geopolitics, primarily nuclear saber-rattling by North Korea and bellicose rhetoric from Mr. Trump. The euro is seen as a safe haven from the turmoil.

In addition, investors have sold dollars and bought euros after becoming more optimistic about the eurozone’s prospects for growth.

Mr. Draghi may have tried to talk the euro down on Thursday by stressing that a stronger currency could alter assumptions about future inflation. But if that was his goal, the jawboning did not work — the euro rose about 1 cent to $1.20 after his remarks.

The European Central Bank is running out of time. It has been printing money for more than two years, using newly created euros to buy government and corporate bonds. It hopes to make it easier for governments to deal with their debts and cheaper for corporations to raise money that they can invest.

The bank has said it will spend 60 billion euros, or $72 billion, a month in eurozone bond markets at least through December, but has not said what it will do after that. Mr. Draghi reiterated Thursday that it will not raise its benchmark interest rate, currently zero, until it has ended the bond purchases. That means rate increases are probably still years away.

There may be another reason the European Central Bank must dial back the stimulus — the supply of bonds may be getting scarce.

When it announced its quantitative easing program, the bank promised not to buy more than 33 percent of any one bond issue, to avoid distorting the market too much. The limit is also designed to protect against legal challenges by critics who say the bond buying is illegal because the central bank is barred by law from using its printing presses to finance eurozone governments.

Many analysts believe that it is becoming increasingly difficult for the bank to avoid exceeding the limit for German Bunds and other kinds of bonds because it has already bought so many.

Mr. Draghi dismissed those concerns Thursday. “These doubts were present at the very beginning of the program,” he said. “I’m confident we will be able to exploit all the flexibility the program has.”

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