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Dovish Draghi looking increasingly isolated amid calls to ‘taper’ stimulus

The views of Mario Draghi, the European Central Bank (ECB) president, are increasingly at odds with other policymakers but also with a surprisingly upbeat euro zone economy, experts have warned.

"Extraordinary measures are suitable for extraordinary times and categorically we are not in extraordinary times now. Look at the euro zone economy, it's on fire, growth is way above trend and it's shooting the lights out, so it does look a little weird," Nick Gartside, the international chief investment officer at JPMorgan Asset Management, told CNBC on Tuesday.

Speaking to a European Parliament committee on economic affairs on Monday, the ECB president argued that extraordinary monetary policies are still needed in order to raise inflation. "For domestic price pressures to strengthen, we still need very accommodative financing conditions, which are themselves dependent on a fairly substantial amount of monetary accommodation," he said, according to Reuters.

Mario Draghi
Alex Kraus | Bloomberg via Getty Images
Mario Draghi

His words, intended to temper expectations of any policy move by the central bank in June, weighed on the euro and seen European bond yields tick higher. The common currency earlier on Tuesday hit a more than one-week low of $1.111 against the dollar, although has since recovered to around $1.117. The euro shot higher Tuesday afternoon on a report by Reuters that said, citing unnamed sources, that ECB policymakers could discuss dropping its pledges to increase stimulus during their regular meeting next week.

These price movements come as the ECB's official stance on dovish, ultra-loose monetary policy comes under increasingly heavy criticism. Jens Weidmann, Germany's representative on the ECB's Governing Council and president of the Bundesbank, said the current expansive monetary policy is "appropriate in principle" but also asked when the central bank would start to normalize.

"As a result of the economic recovery and a predicted inflation rate of almost 2 percent in 2019, it is quite legitimate to ask when the Governing Council should consider monetary policy normalization," he said in Berlin on Monday, according to Reuters.

Meanwhile, JPMorgan's Gartside, highlights that Draghi's dovish comments are starting to look a little bit odd, but underlines a potential reason for his stance.

"Maybe the ECB are very wary of doing a 2011, and remember that was the year when they hiked rates in April, hiked rates in July, to cut them by the end of the year," he told CNBC.

Paul Donovan, UBS chief economist, also weighed in, joking that Draghi has not begun his rehabilitation program to overcome his "addiction to easing."

"Draghi told the European Parliament yesterday (Monday) that he did not have an easing problem, that it was only recreational easing and he could quit anytime that he wished to. It was just that he did not wish to," he said in his daily audio comment on Tuesday.

Donovan believes the rest of the Governing Council will not allow Draghi to get away with aggressive dovishness for much longer. He predicts the ECB is likely to organically tighten policy in 2018, reducing the ECB balance sheet as a proportion of GDP (gross domestic product). The debate at the central bank seems to be shifting from if and when the central bank will begin normalization, to how quickly.

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