World Economy

ECB to Remain Patient, Persistent, Prudent

Mario DraghiMario Draghi

Mario Draghi promised that the European Central Bank will take its time to lift interest rates, reinforcing last week’s agreement by policy makers to keep borrowing costs unchanged at least through the summer of 2019.

“We will remain patient in determining the timing of the first-rate rise and will take a gradual approach to adjusting policy thereafter,” the ECB president said in a speech in Sintra, Portugal, on Tuesday, Fin24 reported.

“The path of very short-term interest rates that is implicit in the term structure of today’s money-market interest rates broadly reflects these principles.”

The euro extended declines after Draghi’s speech. The single currency was down 0.7% against the dollar, trading at $1.153.

Draghi made it clear that the ECB’s plan to halt its bond-buying program this year, closing an extraordinary chapter in a decade-long struggle with financial crises and recession, doesn’t mean the central bank is ready to withdraw its support.

He said eurozone inflation is finally picking up and the economy is showing underlying strength, while he also cautioned that uncertainty has grown.

“The downside risks to the outlook come from three main sources,” he said. “The threat of increased global protectionism prompted by the imposition of steel and aluminum tariffs by the US; rising oil prices triggered by geopolitical risks in the Middle East; and the possibility for persistent heightened financial market volatility.”

The comments come just as China vowed to retaliate “forcefully” against President Donald Trump’s threat to impose tariffs on another $200 billion of Chinese imports. At the same time, the Organization of Petroleum Exporting Countries signaled ahead of its meeting in Vienna this week that it will raise oil production only moderately.

Against this backdrop, the ECB president warned that, after years of low investment, the economy is hitting its speed limit. Capacity utilization stands above its long-term average in the eurozone and in all large economies, he said.

While companies have stepped up hiring, making the current upswing “job-rich,” investment has been slow to rise.

“The flipside of rising labor utilization has been a lack of capital deepening,” Draghi said. “Firms should increasingly turn to capital to lift capacity—a process that has already begun as business investment has picked up and now stands above its pre-crisis level.”

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