World Economy

Draghi Reaffirms ECB’s Balanced Outlook Growth

Draghi Reaffirms ECB’s Balanced Outlook Growth
Draghi Reaffirms ECB’s Balanced Outlook Growth
Risks to growth are still broadly balanced, while the uncertainty surrounding the ECB’s inflation outlook is receding, helping to give the euro a boost

Mario Draghi says the eurozone economy is still solid enough to cope with global risks, even with new European Central Bank forecasts showing that growth will cool slightly faster than previously predicted.

“We are observing an underlying strength of the economy that makes us think that the downside risks are going to be mitigated by the improvement in the labor market and rising wages,” the ECB president told reporters in Frankfurt. “The major source of uncertainty that we see in global output comes from the rise of protectionism,” Bloomberg reported.

Draghi spoke within hours of the Turkish central bank’s decision to raise interest rates by the most since Recep Tayyip Erdogan came to power, the latest twist in emerging-market turmoil that has combined with US tariff threats and Brexit to complicate the global economic outlook. While the ECB’s growth forecast for the eurozone was cut for this year and 2019, the downgrade is slight and the inflation outlook is unchanged.

Draghi said the risks to growth are still “broadly balanced”, sticking to language the governing council has used for more than a year. Bloomberg reported this week that the monetary committee compiling the new economic forecasts sees the risks as now tilted to the downside. The governing council has the right to make its own assessment.

The president spoke after the council confirmed it will slow asset purchases next month and anticipates phasing them out by year-end.

Policy makers reiterated their expectation that interest rates will stay at record lows “at least through the summer of 2019”. Draghi said the measures as a whole—including the reinvestment of maturing debt—will continue to provide support.

“The unanimous view of the council was that the present monetary policy stance is robust,” he said. “Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term.”

  Inflation Outlook

Draghi said the uncertainty surrounding the ECB’s inflation outlook is “receding”, helping to give the euro a boost.

His remarks came after the central bank’s September meeting, in which policymakers confirmed their plans to halt the vast bond-buying program at the end of this year.

Despite patchy economic data released over the past couple of months, the ECB left its expectations for inflation from 2018 to 2020 unchanged from June at 1.7%.

Draghi’s confidence on price growth provided a tailwind to the common currency, which was already rising on Thursday afternoon after the release of US data that showed consumer prices grew less quickly in August than expected.

At pixel time, the euro was up 0.45% on the dollar to $1.167. That gain outpaced the 0.28% rise for the British pound.

Draghi added that the eurozone had been experiencing “growth above potential for some time”. He said that labor market conditions were improving with “9.2 million jobs being created in the eurozone since 2013, and rising wages.”

“We are confident that our present monetary policy stance is consistent with our [inflation] aim,” he said.

  Fresh Warning on High Debt

Draghi upped his push for governments to keep their debt in check amid concern over the budget plans in Italy.

The Italian, a former governor of the nation’s central bank, also hinted that politicians in the ruling coalition have hurt the economy with wild promises and conflicting messages about election pledges and taking steps to keep the deficit in check.

“Words in the last few months have changed many times,” he said. “Unfortunately, we’ve seen that words have created some damage and interest rates have gone up for households and gone up for firms.”

The remarks are effectively an attack on Italy’s deputy prime ministers, Luigi Di Maio of the anti-establishment Five Star Movement, and Matteo Salvini of the League. Their comments over the summer have unsettled investors, sowed doubt that the government will keep debt in check and sent bond yields higher.

Draghi said that once Italy’s budget law is drafted and debated in the parliament in Rome, “then savers, capital markets and investors will formulate their view.”

Italy, which has a debt-to-GDP ratio above 130%, is due to release the economic framework for the budget by the end of the month and submit its full plan to the EU by mid-October. While the government says it will respect European Union limits on budget deficits, some of its promises are costly and could push the debt ratio even higher.

Add new comment

Read our comment policy before posting your viewpoints