Mario Draghi says the euro-zone econ­omy is slowly im­prov­ing

Re­marks come as Euro­pean Cen­tral Bank holds steady on in­ter­est rates and QE

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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.

Alex Kraus / Bloomberg

Mario Draghi, the pres­i­dent of the Euro­pean Cen­tral Bank, says that eco­nomic risks “are still tilted to the down­side”.

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