Draghi clears path for eurozone as momentum builds
MARIO Draghi says the euro region is firing on all cylinders, and he’s not about to get in the way.
After the International Monetary Fund (IMF) raised growth forecasts and the global elite in Davos heaped praise on the economy’s brighter prospects, the European Central Bank (ECB) president gave his own vote of support by saying that an interest-rate increase this year is very unlikely. That’s a green light for an expansion that’s entered its fifth year.
“You could call it ‘Operation Overheat’,” said Richard Barwell, an economist at BNP Paribas Asset Management in London. “By the time Draghi walks out the front door, unemployment could be setting record eurozone lows.”
The economy grew the fastest in a decade last year, and gross domestic product data due on Tuesday will probably show a 19th consecutive quarter of expansion at the end of 2017.
The region gathered momentum in January, with a Purchasing Managers’ Index suggesting quarterly growth of 1% and German business confidence at a record high.
Still, the euro’s ascent may yet become a thorn in the economy’s side if it curbs exports and damps prices. Much of the attention on Thursday was on Draghi’s response to US Treasury Secretary Steven Mnuchin’s remarks that appeared to welcome a weaker dollar.
Draghi hit back, saying such comments may violate agreements to refrain from competitive devaluations. Despite US President Donald Trump saying later that he favours a strong dollar, the US currency continued its drop yesterday.
The euro was up 0.7% at US$1.2481 at 8:56am Frankfurt time, the strongest in more than three years.
Yet the ECB chief also said the euro’s strength is partly due to the region’s improving outlook – the IMF this week predicted 2.2% growth in 2018, up from a previous estimate of 1.9% – and crucially, he declined to say that the currency has climbed too high. It rose further as he spoke.
“His commentary on growth was relatively bullish,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam. “If you’re trying to talk down the euro, those kinds of comments are extremely unhelpful.” Even with the solid pace of growth, returning inflation to the ECB’s goal still depends on central-bank stimulus, Draghi said. While he officially kept policy guidance unchanged, he added an important note on the timing of withdrawing that stimulus.
“Based on today’s data and projections, I see very few chances at all that interest rates could be raised this year,” he told reporters in Frankfurt.
The ECB stuck by its plan to con€ tinue buying 30bil (US$37bil) of assets a month until at least the end of September, and reiterated that rates would stay low well beyond that.
The ECB will update its forecasts for growth and inflation at its next monetary-policy meeting in March.
While most economists foresee a change in the communication on the outlook for stimulus then, some members of the Governing Council are said to be pushing for a delay.
“We are predictable but we are not pre-committed,” Governing Council member Francois Villeroy de Galhau, the head of France’s central bank, said in a Bloomberg Television interview yesterday in Davos.
“We still have three or four monetary meetings to decide till September, so be patient.”