Draghi cautiously upbeat on Eurozone economy
ECB chief says too early to declare victory
It is too early for the European Central Bank to declare victory in its quest to boost euro zone inflation despite signs the bloc’s economic recovery is strengthening, ECB President Mario Draghi said yesterday.
Draghi’s comments confirmed he is in no rush to raise interest rates or wind down the ECB’s 2.3 billion euro bond-buying program despite insistence from richer euro zone countries such as the Netherlands and Germany. But he did hint at potential changes to the ECB’s ultra-loose policy message. “Incoming data confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished,” he told a hearing of the Dutch parliament.
“Nevertheless, it is too early to declare success. Underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend.”
The ECB is expected to tweak its policy message next month to reflect an improved economic situation but keep policy on hold. Sources told Reuters last month some or all the references to prevailing downside risks to the outlook, to the possibility of further rate cuts or to larger asset purchases may be taken out. “Some of the elements of our forward guidance are meant to address the tail risks of ... inflation behavior,” Draghi told the Dutch parliamentarians. “And to the extent that the balance of risk for growth gradually improves, also the probability of these tail risks become less and less.”He added the ECB did not plan to change the rules of the bond-buying program to avoid the risk of running out of sovereign debt to buy in some countries, despite calls to do so by some of its policymakers. Draghi said the benefits of the ECB’s monetary stimulus were outweighing its side effects, but acknowledged rising property prices and high household debt in some countries, including the Netherlands. “We do not currently see compelling evidence of overstretched asset valuations at the euro area level, but we do see that real estate dynamics or high household debt levels in some countries signal the risk of increasing imbalances,” Draghi said. “Such risks also exist in the Netherlands.”
Draghi was greeted by finance committee chairman Pieter Duisenberg, the son of Wim Duisenberg, the first head of the ECB when it was created in 1998 ahead of the introduction of the shared euro currency in 1999. Wim Duisenberg died in 2005. The committee, however, gave Draghi anything but a nostalgic reception. The ECB’s stimulus programs have provoked criticism in the more prosperous northern European countries such as Germany and the Netherlands. That’s because the stimulus efforts to lower market interest rates are seen as hurting savers and bailing out less financially solid countries. Lawmaker Tony van Dijck told Draghi that “you’re not a hero” in the Netherlands by depriving savers of returns on their holdings. Draghi responded that the stimulus had benefited the economy and ordinary people by helping boost employment. He said the policies had played a role in the creation of 4.5 million jobs over the last three years. Analysts expect the ECB to signal later this year it will taper the stimulus program in 2018.
The currency union’s economy grew 0.5 percent in the first quarter and unemployment has fallen slowly to 9.5 percent, but with sharp differences between countries. Inflation, meanwhile, has risen to 1.9 percent, in line with the ECB’s goal of just under 2 percent. But the bank has warned it needs to see that inflation is back on track in a sustainable way. Core inflation, which excludes volatile food and fuel prices, remains at a weak 1.2 percent. Withdrawing the stimulus will have far-reaching effects. It will mean higher interest costs for longer-term borrowers such as corporations, governments and people with house mortgages. It will make it easier to save for retirement and to fund pension plans out of current income. It could also send bond prices lower in the short terms. Over the longer term, higher rates should make conservative holdings such as savings accounts and bonds more attractive relative to riskier ones such as stocks. — Agencies