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Draghi Criticizes Proposed U.S. Tariffs as ECB Signals Tighter Policy -- 2nd Update

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03/08/2018 | 04:14pm CEST

By Paul Hannon and Tom Fairless

European Central Bank President Mario Draghi said tariffs proposed by President Donald Trump raise questions about the strength of the trans-Atlantic alliance, as the bank signaled a shift toward tighter monetary policy.

Speaking during a news conference Thursday, Mr. Draghi said the immediate impact of the proposed tariffs on steel and aluminum would likely be small, but could be greater if other countries retaliated.

Mr. Draghi said the proposed tariffs added to existing "worry and concern" over the state of international relations, and particularly those between the U.S. and Europe.

"If you put tariffs against your allies, one wonders who the enemies are, " he said.

Mr. Draghi joins a chorus of European officials and U.S. lawmakers to speak out against the tariffs and warn of negative consequences for the global economy. The European Union on Wednesday urged Mr. Trump to rethink the tariffs, challenging U.S. national security claims and threatening to strike back unless the White House reverses course.

In another sign of growing tensions between Europe and the U.S., Mr. Draghi offered a critique of U.S. plans to roll back postcrisis financial rules, which would relax dozens of rules for small to medium-size banks.

"I would flag this in one major risk in the years ahead," he said, adding that the rollback would "repeat the same mistake" legislators made in the years leading up to 2008.

The possibility of an international trade war and a more fragile financial system didn't prevent the ECB from signaling a shift toward tighter monetary policy.

In a policy statement, the ECB dropped a long-held pledge to accelerate its EUR30 billion ($37 billion) monthly bond-buying program if the region's economy deteriorates. That promise, designed to reassure investors, had been criticized by some ECB officials as excessive given the strength of the bloc's economic recovery.

The move sets the ECB firmly on course to phase out a historic stimulus program that is credited with reinvigorating growth in the 19-nation eurozone but has faced heavy criticism in the bloc's biggest economy, Germany.

Mr. Draghi played down the significance of the move, saying it reflected the pickup in growth since the pledge was introduced at the end of 2016.

"It's essentially a backward-looking decision," he said, stressing that "victory cannot be declared yet" in the central bank's battle to raise the annual rate of inflation.

The euro nudged higher after the policy announcement to trade up 0.1% against the dollar on the day, before losing ground to trade 0.3% lower after Mr. Draghi's press conference.

The decision to drop the pledge was accompanied by new forecasts from the ECB's economists, who now project growth at 2.4% this year, compared with 2.3% when they last released projections in December.

That upgrade indicates that the ECB doesn't expect the threat of a trade conflict with the U.S. to weigh heavily on the eurozone economy this year.

Mr. Trump is expected to sign a decree this week laying out his plan to impose new tariffs on steel and aluminum, sparing both Canada and Mexico. That could happen as soon as Thursday afternoon.

The direct impact of the proposed tariffs is likely to be modest. Economists at UBS calculate that sales of steel account for just 1.4% of eurozone exports to the U.S., or 0.2% of total eurozone exports. However, there is a risk of an escalation that could inflict greater damage.

Investors have been watching closely for signs as to when the Frankfurt-based central bank will phase out its quantitative-easing, or QE, program and start raising interest rates. The timing of that decision will have a large impact on market interest rates and asset prices.

The ECB said in its statement that it will continue to purchase bonds through September, "or beyond if necessary," and that its key interest rates won't rise "for an extended period of time."

The eurozone economy grew at an annualized pace of 2.4% in the fourth quarter of last year, and unemployment is expected to fall to 8% by the end of the year, the lowest level in a decade. Inflation has remained weak, however. It slid to just 1.2% last month, some way from the ECB's target of just below 2%. The ECB's economists cut their inflation forecast for next year to 1.4% from 1.5%, but still see a pickup to 1.7% in 2020.

ECB officials had signaled they could give fresh guidance on the QE program early this year, but analysts had curbed their expectations for Thursday's meeting in recent days, pointing to burgeoning risks in the world economy.

Financial markets have seesawed since the ECB's January policy meeting amid concerns over the retreat of central banks and the risk of global trade wars.

Mr. Draghi also said the ECB is closely monitoring financial-market volatility and a recent appreciation of the euro currency, which has risen from $1.06 a year ago.

Write to Paul Hannon at paul.hannon@wsj.com and Tom Fairless at tom.fairless@wsj.com

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