2017-07-20 08:15:03
Mario Draghi of European Central Bank Faces a Monetary-Policy Tightrope

FRANKFURT — The metaphor of the moment at the European Central Bank’s headquarters is “tightrope.” As in, what Mario Draghi, the bank’s president, will have to walk on Thursday.

Financial markets have been hypersensitive in recent weeks to anything that Mr. Draghi has said about plans to wind down central bank stimulus. Any statements that change investor expectations about central bank plans can have a violent effect on bond prices and currency rates.

Yet the day will soon come when the European Central Bank begins tapering its purchases of government and corporate bonds, the so-called quantitative easing it has been using to drive down market interest rates.

The bank’s Governing Council left monetary policy unchanged after its meeting on Thursday, but Mr. Draghi will have a difficult job when he faces the media at a news conference after the meeting: to gently prepare markets for the day the central bank will begin withdrawing stimulus, without provoking an overreaction.

“The E.C.B. press conference on Thursday will serve to show what a tightrope act the central bank now faces,” Jörg Krämer, chief economist at Commerzbank, said in a note to investors this week.

Analysts will be deconstructing Mr. Draghi’s opening statement, which will have the Governing Council’s endorsement, for any subtle changes in guidance.

But Mr. Draghi will probably avoid sending strong signals one way or another. Although the eurozone is in the midst of a broad economic upswing, trouble spots remain, notably Italy.

The European Central Bank is expected to wait until its next monetary policy meeting, in September, to provide clear signals about how quickly it will reduce its purchases. Until then Mr. Draghi will try to keep the bank’s options open.

The difficulty he faces is that even subtle changes in tone or language can ripple through financial markets. Last month, bond markets gyrated for several days based on a few lines in a speech that Mr. Draghi gave in Portugal.

“The central bank can accompany the recovery by adjusting the parameters of its policy instruments,” he said, in part.

On one hand, Mr. Draghi seemed to be stating the obvious. But among traders and investors, the statement crystallized expectations that the end of quantitative easing was near.

The value of the euro compared to the dollar has been on an upward trend ever since, an unwelcome development from the central bank’s perspective because a stronger euro makes products manufactured in the eurozone more expensive for foreign buyers.

Mr. Draghi does not want his words to throttle the region’s recovery. That is why the news conference will be such a high-wire act.