Eurozone Economy Resilient to Recent Shocks

The eurozone economy is proving surprisingly resilient to a series of recent shocks and growth remains on a steady path in line with projections, European Central Bank Vice President Vitor Constancio said on Sunday.

Inflation is set to rapidly accelerate in the next few months, exceeding 1% by next spring, provided the ECB’s supportive monetary stance is maintained, Constancio said in Washington, Reuters reported.

Facing the threat of deflation, the ECB has unleashed unprecedented stimulus in recent years, cutting rates into negative territory, buying over €1 trillion ($1.12 trillion) of assets and giving banks free loans to boost lending.

Yet inflation has missed its target of close to 2% for three and a half years and will not rise back to near that level until late 2018 or 2019, according to the central bank’s projections.

Responding to recent talk about the end of the asset purchase program, due to last at least until March, Constancio said the ECB was working to implement the measures, not end them.

“We will have to decide closer to that date the final timeline of the program and its conditions,” he said. “We have not yet started any discussion about this issue.”

Markets expect the ECB to extend the scheme by at least three months at its December meeting.

Speaking at the International Monetary Fund’s annual meeting, Draghi said he saw no evidence that low inflation has become embedded in wage setting, a concern for policymakers as low wage growth could perpetuate low inflation.

Draghi added that eurozone growth has appeared to stabilize and he sees growth holding steady for the rest of the year.

Still, the outlook faces downside risks, primarily from geopolitical risk and lower-than-projected growth in world trade.

While admitting risks and negative side effects, Draghi said he saw nothing that could be called asset price bubbles.

Dismissing criticism that low interest rates were hurting banks, Constancio said lenders have so far benefited, but over the long term they still had to undertake major restructuring.

“Contrary to some perceptions, our monetary policy has had a positive effect on the profitability of banks since 2014,” he said.

“We are aware that some of these effects will wane with time and that the banking sector will have to undergo structural reforms to overcome the challenges of a low profitability environment that, looking forward, is not sustainable,” he said. “Public policy initiatives are necessary to foster the restructuring efforts.”