The ECB chief appears unruffled by an uncertain outlook
Frankfurt am Main (AFP) - European Central Bank chief Mario Draghi said Thursday the eurozone economy was strong enough to weather rising “uncertainties”, sticking fast to his plan to scale back crisis-era stimulus by the end of the year.
“Uncertainties relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility have gained more prominence recently,” Draghi acknowledged at a Frankfurt press conference.
However, “we are observing an underlying strength of the economy that makes us think the downside risks are going to be mitigated,” he added.
That made governors confident enough to halve “quantitative easing” (QE) purchases of government and corporate bonds from October, to 15 billion euros ($17.4 billion) a month.
The asset-buying will continue at that rate until the end of December, when the bank will wind it up – “subject to incoming data confirming our medium-term inflation outlook,” Draghi reiterated.
ECB governors also left interest rates untouched at historic lows, sticking to their guidance that they would remain unchanged “at least through the summer of 2019”.
“For now, and until the end of 2018, the ECB will happily stay on taper (winding-down) autopilot,” commented economist Carsten Brzeski of ING Diba bank.
- ‘Deeds, not words’ from Italy -
Draghi stuck to an assessment from past ECB gatherings that risks to the growth and inflation outlook were “broadly balanced” between positive and negative.
However, clouds have gathered on the horizon since governors agreed their QE exit plan in June.
Currency crises in emerging economies Turkey and Argentina threaten export markets for some eurozone countries.
US President Donald Trump’s protectionist impulses could yet sap both bilateral trade with the European Union and undermine global economic growth in case of a major escalation with China.
And Italy’s governing coalition of anti-immigration and anti-establishment populists must present a budget by next month – with some fearing a new spending splurge in the highly-indebted euro member.
“There is a problem and it’s Italy,” EU Commissioner Pierre Moscovici, who holds the economy and finance portfolio, said earlier Thursday.
Draghi responded that “what we are now waiting for is facts” from the Italian government.
“The Italian prime minister, the Italian minister for the economy and the Italian foreign affairs minister have all said that Italy is going to respect the rules” that limit EU countries’ deficit spending, he added.
What’s more, financial market fear for the eurozone’s third-largest economy – which increased interest rates for firms and households – “hasn’t created much of a spillover to other euro area countries,” Draghi noted.
- ‘Learning from Fed’s mistakes’ -
Looking to the other threats to the currency bloc, the ECB chief noted that “what’s happening in Turkey and Argentina so far doesn’t show any significant spillover” to the eurozone.
He did highlight that protectionist measures that had only been “announced” or “threatened” by countries like the US were not yet included in new growth and inflation forecasts.
For now, a shaky US-EU trade truce is in place and Trump has stopped short of tariffs on all imports to America from China that could sap global growth.
But the central bank economists see eurozone expansion slowing more sharply in the coming two years than in previous forecasts, from 2.0 percent this year to 1.8 in 2019 and 1.7 in 2020.
Meanwhile, they predict price growth steady at 1.7 percent in each of those three years.
“The underlying strength of the economy and the rising wages” should make up for lower oil prices undermining price growth, Draghi said.
Journalists were frustrated in their attempts to draw the ECB boss out of cover on the path future interest rate hikes might take or how the central bank will reinvest the proceeds from the 2.5-trillion-euro stock of corporate and government bonds it has amassed since 2015.
Policymakers plan to buy new bonds with the payouts, hoping to influence markets and keep debt cheap long after ending their asset purchases, but have yet to agree on details.
“Markets might like to have more certainty about the future course of monetary policy, but the ECB needs to keep its options open,” commented Marcel Fratzscher of economic think-tank DIW.
As it withdraws QE by inches, “the ECB has learned from the mistakes of the American Fed and managed to avoid upsets on financial markets,” he added.