Mario Draghi says the euro-zone economy is slowly improving
Remarks come as European Central Bank holds steady on interest rates and QE
Mario Draghi said risks to the euro-area economy have diminished further, even as he stuck to his line that core inflation continues to fall short of the European Central Bank’s comfort zone.
“The risks surrounding the euro area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside,” the ECB president told reporters in Frankfurt yesterday, after the Governing Council agreed to keep policy unchanged, as expected by economists. “Underlying inflation pressures continue to remain subdued and have yet to show a convincing upwards trend.”
The ECB governors left key interest rates at historic lows. The bank kept its main refinancing rate at 0.0 per cent, the rate on the marginal lending facility at 0.25 per cent, and the deposit rate at minus 0.4 per cent – meaning banks have to pay to park money with the central bank.
Mr Draghi said the region’s recovery is becoming “increasingly solid” and that the Governing Council had a discussion on whether to change its assessment on the risks to growth. Rates will stay at present or lower levels for an extended period, and well past the horizon of net asset purchases, which remain flexible in size and duration if the outlook becomes less favourable, he said.
The ECB expects inflation in the bloc to slowly reach its target of at or just below 2 per cent. It was at 1.5 per cent in March.
For the past few weeks, ECB officials have been publicly debating when they might start to wind down asset purchases and raise interest rates. Economists predict the first hints of an exit from this extraordinary stimulus to come by June 8, when the Governing Council next announces policy and publishes projections on the economic outlook.
The ECB could change its forward guidance as a first step toward phasing out QE at the beginning of 2018 and conducting the first rate hike in the third quarter of that year, according to the survey.
After Mr Draghi made his comments, the euro sank to the day’s low and European stock markets and bond yields fell back yesterday, undoing initial gains.
Markets had initially surged on language in the bank’s statement, read by Mr Draghi, which said the recovery was increasingly solid and that downside risks to the euro zone’s recovery had diminished.
But other parts of the statement and Mr Draghi’s replies to questions stressed the barriers the ECB still faces before beginning to tighten both the bank’s stance and the ultra-loose financing conditions it has maintained for the past nine years. Euro zone government bond yields gave up earlier increases and headed lower after Mr Draghi’s comments. Germany’s benchmark 10year Bund yield fell more than 2 basis points to a two-day low at 0.325 per cent, while money market rates fell as investors scaled back ECB rate-hike expectations.
The eurozone Stoxx 50 pared back earlier gains and Italy’s FTSE MIB hit a session low while Eurozone banks hit the low for the day, last down 1.2 per cent.
The euro fell 0.3 per cent on the day to a low of $1.0857.
“The Q&A revealed that ... some of the members hadn’t turned at all whereas I felt Draghi had shifted a little bit to be less dovish,” said Neil Jones, head of foreign-exchange sales at Mizuho.
“I didn’t sense that was unanimous,” he added, saying Mr Draghi’s comment on the easing bias had added to pressure on the euro.
Mario Draghi, the president of the European Central Bank, says that economic risks “are still tilted to the downside”.